Kishida’s latest move to reorganize Japanese capitalism focuses on wages

Prime Minister Fumio Kishida is following last month’s record economic stimulus package by raising workers’ wages as part of his campaign to reorganize Japanese capitalism so that prosperity is more widely shared and growth more sustainable.

On Friday, the ruling party is expected to unveil a set of carrots and sticks that use the tax code to try to get companies to raise workers’ wages and punish those who don’t.

The promised tax breaks are around 50% more generous than already planned, according to a draft Liberal Democratic Party tax plan for fiscal 2022 seen by Bloomberg.

Raising the pay of workers who have been speaking for years will not be easy, however, especially as the Japanese economy has lagged behind other developed countries in recovering from the pandemic.

Success could help growth take hold more firmly, while failure could help the new prime minister join a long list of revolving door leaders across the country, especially if he also struggles to keep the lead. COVID-19 under firm control. Kishida faces an upper house election this summer.

Economists say the tax measures are a good start, but not enough because the faster growth that Japan has long eluded is a tough chicken-and-egg problem. The economy has contracted in five of the past eight quarters, and next year’s growth is expected to be the slowest among the Group of Seven countries.

“Unless it comes with policies to increase productivity and change industrial structures, I don’t think it will work well,” said economist Yusuke Inoue of the Marubeni Research Institute, referring to the tax plan . “Companies that have no money cannot raise wages.

Kishida made increasing middle class incomes a centerpiece of his diary, promising higher wages for public workers such as nurses and orderlies, and calling on companies to give workers a raise of more than 3% in collective bargaining that traditionally takes place in the spring.

This is the level of earnings he seeks to give new impetus to the cycle of wages, prices and growth. Japan’s key inflation indicator is still barely above zero, even after eight years of massive stimulus from the Bank of Japan and with input costs rising at the fastest rate in four decades.

For its part, the country’s largest business lobby, Keidanren, appears to be rejecting Kishida’s appeal. The group advises companies whose profitability has not yet recovered to focus on maintaining employment. Lower pay for job security has been a compromise in Japan for years.

With a key measure of costs for Japanese companies hitting the highest level in decades against the backdrop of peaks in commodity markets and global supply chain issues, many companies have no room to maneuver to consider salary increases, according to economist Harumi Taguchi at IHS Markit.

“Large companies and those with future cash flow will to some extent strengthen their efforts to increase paychecks,” she said. “But I think a 3% jump in total will be very difficult to achieve.”

Japan has given tax breaks to companies that raise wages since 2013, but they haven’t resulted in the kind of wage increases former Prime Minister Shinzo Abe advocated in his Abenomics plan.

In 2019, only around 130,000 companies, or around 3%, were using the existing program, according to the most recent data from the Ministry of Finance. The total tax deductions amounted to the equivalent of about 227 billion yen, a paltry sum for the world’s third-largest economy.

Kishida is trying to break the deadlock by doubling incentives and adding consequences for businesses that don’t play the game, the LDP’s draft tax plan has shown.

Large companies that increase wages by 4% and increase investment in worker training will be able to reduce their corporate tax by 30%. The current deduction is capped at 20%.

For small businesses, the maximum deduction will be reduced from 25% to 40%, with the bar of required increases being maintained at 2.5%.

Large companies that do not even increase their wages by 1% or that do not invest enough in new equipment will not be eligible for certain tax breaks on capital expenditure. The salary requirement is spread over more than two years.

“The important thing is to ensure that any salary increase will be continuous, rather than one-off,” Finance Minister Shunichi Suzuki told reporters on Friday. “We will have to carefully monitor wage developments in the future.”

The Confederation of Japanese Trade Unions, the country’s largest worker cooperative, is questioning whether new tax incentives will succeed where old ones have failed.

“Isn’t it better for the government to collect taxes and invest in forming new industries and invest in people?” A spokesperson for the union, known as Rengo, wrote in an email. “We still have to assess the effectiveness of existing tax breaks.”

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