The government is considering offering tax breaks for companies that invest in strategically important sectors such as semiconductors and storage batteries, in a push to boost Japan's growth potential and ensure economic security, according to an outline unveiled Wednesday.
Alongside the plan, the government is also considering expanding tax reduction measures for small and midsize companies that have lagged behind larger firms in raising pay, which would be in line with Prime Minister Fumio Kishida's push to increase wealth redistribution.
The envisaged changes are part of government efforts to support the economy by mitigating the effects of rising inflation on households through promoting wage hikes and increased investment. They will be included in a new economic package due to be compiled in October.
The creation of a new scheme offering tax breaks to companies that profit from intellectual property, such as patents, has also been floated amid hopes that it would encourage companies to increase investment in research and development, as well as in intangible assets.
The plans were presented to a government panel tasked with realizing a "new form of capitalism," as envisaged by Kishida. Details will be worked out toward the end of the year, as the ruling parties are to debate how to reform the country's taxation system.
Kishida on Monday instructed Cabinet ministers to use "all possible tools" in drawing up the economic package. Tax breaks are considered among the major instruments that could be utilized to aid the private sector at a time when increasing capital spending is seen as crucial.
To support private consumption, another key component of domestic demand, inflation relief will be one of the new package's five pillars, whose total size has yet to be determined.
Parts shortages during the COVID-19 pandemic have prompted a review of existing supply chains, with advanced economies growing increasingly concerned that overreliance on China could pose a threat to economic security.
Automakers have suffered cuts in output due to difficulties in securing necessary components such as semiconductors.
The government is seeking to revitalize the country's chip sector after competitors from China and South Korea overtook Japan's top semiconductor companies.
The government has already decided to provide financial assistance to Taiwan Semiconductor Manufacturing Co. and Japanese chipmaker Rapidus Corp. for building production plants in Japan. The envisaged tax breaks for strategically important companies are aimed at lowering the bar for firms to construct plants in the country.
Constructing an advanced chip factory requires a hefty initial investment to get it up and running, while profitability is always uncertain. Nonetheless, the measures are expected to create spill-over effects for local economies and create jobs.
Besides the envisaged tax breaks, the government will decide on how much fiscal spending will be allocated to fund the economic package, with a supplementary budget to be formed for the current fiscal year until next March.
While Kishida has called for robust pay hikes above the inflation rate, real wages have continued to decline, despite annual wage negotiations between labor unions and management for fiscal 2023 resulting in the sharpest average pay hike in three decades.
As smaller firms face difficulties coping with labor shortages and raising pay, the government is considering providing subsidies to those investing in labor-saving technologies, according to the plan.
Japan's labor market conditions remain tight, partly due to an aging society, which economists say should support wage growth. The government wants to make it easier for workers to reskill and change jobs and plans to boost the minimum hourly wage to 1,500 yen ($10) by the mid-2030s from the current level of around 1,000 yen.
