Japan implements tax cuts to reduce household burden, tackle deflation

In a move aimed at counteracting the impact of rising prices on households and breaking the long-standing deflationary mindset, Japan's ruling Liberal Democratic Party's tax reform panel has approved income tax breaks, as per a document reviewed by Reuters on Thursday.

The decision, backed by the LDP and its coalition partner Komeito, prioritises tax cuts over increases in defence spending for the next fiscal year, reflecting Prime Minister Fumio Kishida's commitment to a pro-growth agenda amidst public discontent over the escalating cost of living, diminishing real wages, and a fundraising scandal prompting a reshuffle of top ministers.

The document reveals that the panel has set a cap on annual household income for those eligible for the income tax cuts, addressing concerns about growing disparities between different income groups. The decision to postpone a tax hike to fund increased defence spending next fiscal year is also highlighted.

The LDP tax panel will not proceed with lowering the cap on mortgage borrowing for households next year. To stimulate a positive growth cycle driven by private-sector demand, the tax policymakers are intensifying tax breaks for companies that raise wages, even allowing loss-making small firms to carry over preferential tax treatment for up to five years.

Additionally, the tax panel has agreed on a new tax scheme to incentivise domestic investment in companies crucial for decarbonisation and economic security. The government plans to offer tax incentives for a decade, focusing on five strategic areas such as electric vehicles and high-tech chips, aiming to attract significant investments.

This comprehensive scheme aims to facilitate easier investment in Japan by providing tax benefits for projects deemed strategically important for the country's green transformation. The ruling coalition is set to incorporate these tax breaks into the fiscal 2024 tax reform framework, expected to be finalised on Thursday.

(With Reuters inputs)