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NO. 46 — December 12, 1997

 

Feature Article

CORPORATE INCOME TAX REFORM IN JAPAN by Hiroyuki Takahashi

Hiroyuki Takahashi is on loan to the Japan Economic Institute from Keidanren,
where he specialized in tax matters as a member of the staff
of the Tax Affairs Group of the Economic Policy Bureau.

Summary

At 37.5 percent, Japan's top corporate income tax rate is just slightly higher than the comparable U.S. rate of 35 percent. However, the transpacific gap in effective corporate tax rates — a popular measure for international comparisons — is almost 9 percentage points. That divergence gives credence to corporate Japan's repeated complaints that it is saddled with close to the heaviest tax burden among major industrial nations. It also explains the increasingly louder chorus of calls for a cut in the corporate tax rate, both national and local, to at least the international level.

In FY 1989 and FY 1990 the government trimmed the corporate tax rate by a cumulative 4.5 percentage points to its current level. Except for that change, which was partly offset by the end of the tax break for dividends, Japan's corporate tax system has not been overhauled in more than 30 years. Politicians and bureaucrats alike pay lip service to the need to bring Japan's corporate tax rate into line with the international figure to promote economic restructuring and to create an environment that will reenergize existing businesses and stimulate the creation of new ones. In virtually the next breath, however, they say that Japan's strained fiscal condition will not permit a big tax cut in the near future.

With the business community intensifying its campaign for a tax cut in FY 1998 and the governing Liberal Democratic Party leaning in that direction, the Ministry of Finance is trying to limit the scope of any reform so as not to decrease corporate tax revenues. It currently is searching for ways to expand the tax base to maintain revenue levels.

Given the varied and often opposing interests of different business groups and the pending move to lower the government's huge budget deficit over five years, few people are willing to bet on whether corporate Japan will succeed in winning major changes in the tax system in the near term. If any FY 1998 "reform" results in only a small reduction in business taxation, the corporate tax debate will continue into the 21st century.

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Weekly Review

JAPAN'S ECONOMY RECOVERED SLIGHTLY IN LATE SUMMER by Douglas Ostrom

Analysts had reason to hope that the Economic Planning Agency's December 3 release of the gross domestic product figures for the July-September quarter would break the seemingly unending string of bad economic news that Japan has endured in recent months. If nothing else, they expected that the new numbers would take some of the sting out of the spring GDP data, which had shown the economy contracting by a preliminary 11.2 percent on a real, annualized basis. That figure was endlessly repeated as backdrop in discussions of the multiple collapses in Japan's financial system in November (see JEI Report No. 45B, December 5, 1997).

 

JAPANESE BANKS RUSHING TO RESTRUCTURE by Jon Choy

Japan's banking sector is desperately trying to restore public confidence in its soundness in the wake of the recent failures of several of its members, including Hokkaido Takushoku Bank, Ltd., the country's 10th-largest nationwide commercial or city bank (see JEI Report No. 44B, November 21, 1997). The mid-November collapse of Takugin, as it is called, and the bankruptcy a week later of Japan's fourth-biggest brokerage house — Yamaichi Securities Co., Ltd. (see JEI Report No. 45B, December 5, 1997) — shocked the average Japanese saver and investor. These events seemed to confirm their worst fears about the plight of the nation's financial sector.

 

IMF, JAPAN TO AID SOUTH KOREA IN RECORD BAILOUT by Eric Altbach

South Korea and the International Monetary Fund reached agreement December 3 on a $57 billion financial rescue package, the largest bailout ever assembled by the international financial institution. According to Managing Director Michael Camdessus, the IMF will contribute $21 billion in standby credits. The World Bank will make available a $10 billion credit line to support specific structural reform programs, while the Asian Development Bank will ready a $4 billion loan facility.

 

TOKYO, WASHINGTON DIFFER ON LAND-MINE BAN, CIRCLE EACH OTHER ON ECONOMIC ISSUES by Barbara Wanner

Parting ways with Washington on a heart-rending issue in global diplomacy, Foreign Minister Keizo Obuchi joined representatives of more than 120 nations December 3 in Ottawa, Ontario to sign a global treaty banning the production and the use of antipersonnel land mines. Mr. Obuchi declared that Japan is determined to work in cooperation with other countries to achieve "zero victims" by the early part of the 21st century. To that end, Tokyo will allocate ¥10 billion ($100 million at ¥100=$1.00) over five years to provide equipment and technology for land-mine clearance and to assist the mostly civilian victims of this deadly, indiscriminate weapon.

 

WTO FINDS NO DEVELOPER FOR U.S. PICTURE OF JAPAN'S PHOTO MARKET by Susan MacKnight

Washington will be hard put to convince Tokyo to go after exclusionary manufacturer-distributor ties and other structural barriers that impede American access to Japan's markets. That is one take on the implications of the World Trade Organization's unequivocal rejection of the groundbreaking White House complaint that the Japanese government stacked the deck against foreign competitors in the domestic market for consumer photographic products (see JEI Report No. 29B, August 1, 1997). The WTO dispute-settlement panel given the unenviable job of resolving this factually and legally complex case released its preliminary ruling December 5 in a 469-page confidential report.

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