Japan offers 30% tax break to big companies that hike wages by 4%

Its economy contracts 3.6% sequentially in third quarter

Japan will deny some tax breaks to big companies that do not hike wages while boosting deductions for those that do, as it moves to boost domestic salaries, a final draft of the ruling party’s annual tax reform plan showed on Wednesday.

Large companies that raise wages by 4 per cent from the previous year will get deductions of up to 30 per cent of taxable income, up from the maximum of 20 per cent now, according to the plan for the next fiscal year’s tax reform obtained by Reuters. Small firms that raise wages by 2.5 per cent will qualify for a tax deduction of up to 40 per cent from the current maximum of 25 per cent.

Wages in Japan have stayed largely flat over the past 30 years, the OECD data shows, causing “lost decades” and grinding deflation, while the ruling  Liberal Democratic Party (LDP) and its coalition ally Komeito are expected to endorse the plan on Friday. 

The carrot-and-stick approach underscores Prime Minister Fumio Kishida's focus on distributing wealth to households, with steps, such as urging pay hikes of 3 per cent or more by firms whose profits have returned to pre-pandemic levels. “The move shows the government has no choice but to intervene in private-sector wages to stoke a positive cycle of broad wage hikes and sustainable inflation,” said analyst Yoshimasa Maruyama.

But it was doubtful the measures would immediately prompt firms to raise wages as they had recently lifted pay, added Maruyama, the chief market economist at SMBC Nikko Securities.

Downgraded growth estimate

The country's economy contracted at a 3.6 per cent annual rate in July-September, according to a revised estimate released Wednesday. The downgraded growth estimate for the last quarter, down from an earlier report of a 3 per cent contraction, reflected weaker consumer spending and trade, the government said.