Japan unveils next phase of ‘Third Arrow’ reforms

Jun 25 2014, 00:40 IST
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SummaryCorporate tax cuts, pension fund reform part of plan for boosting growth

Prime Minister Shinzo Abe unveiled a package of measures on Tuesday aimed at boostingsssss Japan's long-term economic growth, from phased-in corporate tax cuts to a bigger role for women and foreign workers, but applause from investors is likely to be muted after Tokyo backpedalled on bolder reforms.

Abe took office 18 months ago pledging to end deflation and generate sustainable growth with a 3-pronged strategy of monetary easing, fiscal spending and reform. Experts say the latest instalment of his so-called “Third Arrow” of long-term economic policies, most of which had been trailed in advance, is a step in the right direction, but want to see how they are fleshed out and implemented.

Private economists surveyed by Reuters forecast that the plan could boost Japan's potential growth rate by 0.2-1.5 percentage points from its current level of around 0.5%. But they noted that it would take time.

“Even after the government growth strategy is announced, various legislation must be enacted and companies will take time to start acting. Therefore, it will be 10 to 20 years before the potential growth rate rises,” said Kenji Yumoto, vice chairman of the Japan Research Institute.

Yumoto said it was possible, but very difficult, for Japan to hit the 2% growth level the government says is needed to reduce its mammoth public debt.

Among steps outlined so far is a future cut in Japan’s effective corporate tax rate to below 30% over the next several years, and a promise to reform the $1.26-trillion Government Pension Investment Fund in ways likely to reallocate more money to the stock market. The package is a welcome move for the Bank of Japan, which has called for bold government to help sustain the current recovery fuelled in part by its massive monetary stimulus. BOJ governor Haruhiko Kuroda, a former finance ministry bureaucrat, has also warned against cutting Japan’s corporate tax rate without securing an alternative sou-rce of tax revenue, given Japan’s huge public debt.

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