Japan ruling bloc endorses tax breaks on cars, homes; fiscal reform in doubt

By Tetsushi Kajimoto

TOKYO (Reuters) - Lawmakers from Japan's ruling coalition said on Friday they will give tax breaks to car buyers to offset a sales tax hike planned for next year, amid the looming threat of steep tariffs on Japanese auto exports to the United States.

In its annual tax code revisions, the ruling bloc also approved tax cuts on housing mortgages, out of fear an increase in the sales tax from 8 percent to 10 percent in October 2019 could cause sales of big-ticket items to slump.

"We decided to take considerable steps to level off the impact on cars and housing - two main pillars of consumption - from the planned sales tax hike," Yoichi Miyazawa, tax panel head of the ruling Liberal Democratic Party, told reporters.

The tax breaks underscore Prime Minister Shinzo Abe's will to spend big to avoid a repeat of the economic downturn caused by the April 2014 sales tax hike to 8 percent from 5 percent, as he is putting fiscal reform on the backburner.

Abe has twice postponed the planned hike to 10 percent. But he has vowed to go ahead this time by taking "more than enough steps" to cushion the impact and to level off a surged in demand before the hike and a pullback afterward.

The auto tax breaks target those who buy cars after the hike kicks in. Automobile tax, which is imposed on car owners, will be cut by 4,500 yen ($39.92) a unit. That is expected to reduce national tax revenue by 53 billion yen a year, Miyazawa said.

Tax breaks on mortgages will be extended from 10 years to 13 years for those entering a home purchase contract and moving into their new housing between October 2019 and the end of 2020. This will mean the loss of national and local tax income of 114 billion yen a year, he added.

TRUMP TARIFF THREATS

Friday's tax-code revision comes a few days after U.S. President Donald Trump threatened to impose steep tariffs on imports of Japanese and European cars, saying this would depend on trade negotiations with them.

Japan's biggest automakers and components suppliers fear they could take a severe hit if Washington follows through on proposals to hike tariffs on autos and auto parts to 25 percent.

Abe and Trump agreed in September to start trade talks in an arrangement that appeared, temporarily at least, to protect Japanese automakers from further tariffs on their exports, which make up about two-thirds of Japan's $69 billion trade surplus with the United States.

On top of tax cuts, Abe's government is considering large fiscal spending when it later this month draws up its budget draft for the fiscal year beginning in April. Analysts expect the proposed budget to top 100 trillion yen for the first time.

The tax code revisions will be sent to parliament for approval by the end of March.

($1 = 112.7200 yen)

(Reporting by Tetsushi Kajimoto; Editing by Sunil Nair and Richard Borsuk)