Japan awaits Abe’s third arrow as companies urged to invest

Japanese Prime Minister Shinzo Abe’s reflation campaign shifted to structural domestic reforms after he unveiled a stimulus package offering a short-term cushion for the first sales-tax rise since 1997.

Abe’s administration is honing legislation for its “growth strategy” for the year’s final parliamentary session, an initiative companies will scrutinize for fresh reasons to invest in a domestic market burdened by a shrinking and aging population. For now, they get a slew of tax breaks unveiled with yesterday’s 5 trillion yen ($51 billion) program.

Getting businesses to start distributing their rising profits and near-record cash through higher wages and new projects at home will be key to sustaining a rebound in the world’s third-largest economy. Without pay rises, households will be hit by both higher taxes and living costs -- as energy bills climb after the yen slid 21% the past year.

“What is needed is for the government to provide a long-term vision -- 10 years from now for example,” said Nobuyasu Atago, a senior official at the Japan Center for Economic Research in Tokyo who has worked at the central bank. “Unless the potential growth rate is raised, there is no guarantee that companies will really raise wages and boost capital investment just because of tax incentives.”

Olympic Spending

The stimulus package that Abe said yesterday would be prepared for December will include measures to boost capital investment by smaller companies; spending for the 2020 Olympics; payments to low-income earners; and tax incentives for home purchases.

As well as 1 trillion yen in annual tax cuts, including 730 billion yen in investment tax reductions, policy makers will decide in December on any early end to a levy on companies for earthquake reconstruction, the government said. Without the support measures, the economy would face “an extremely high risk of stalling,” Abe said.

A bigger challenge awaits with reforms that would threaten vested interests, such as reducing labor regulations dating from the 1960s that offered lifetime employment for workers at larger enterprises -- rules that reduce the attractiveness of hiring. Abe, 59, has also identified agriculture, health care and tourism as sectors to be targeted in his so-called third arrow.

The administration is also engaged in trade-liberalization talks with the U.S.-led Trans Pacific Partnership group of nations. Millions of small farmers have opposed the move, seeking to maintain protection for meats, wheat, sugar, dairy and other goods like rice, which has a tariff of 778%.

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