Gao Zhanjun: What Will Japan’s New Round of Tax Cuts Bring? (AI Translation)

【周刊提前读】高占军专栏：日本新一轮减税能带来什么？

On June 1st, Japan initiated a new phase of tax cuts amounting to ¥3.28 trillion, benefiting roughly 95 million ordinary citizens. Each eligible individual is set to receive a tax reduction of ¥40,000 (approximately $250 or ¥2,000 RMB) [para. 1]. This reduction is divided into a ¥30,000 cut on income taxes from salaries and other earnings and a ¥10,000 reduction on residential taxes paid to local governments. Dependents also benefit from this plan, so a family of three, for example, would receive a total reduction of ¥120,000 (approximately $750) [para. 2].

However, high-income earners with annual incomes over ¥20 million (approximately $127,000) and dependent family members living abroad are not eligible for this plan. Low-income earners will receive direct cash subsidies [para. 3]. If a family of three pays less than ¥40,000 in income and resident taxes, the government will compensate them with the difference in cash [para. 4]. If they pay ¥90,000 annually, they will be exempt from this amount and receive an additional ¥30,000 in cash subsidies. Households fully exempt from both income and resident taxes can receive a cash subsidy of ¥70,000 [para. 5].

The tax reduction will take effect starting with wages and bonuses distributed in June. If individuals cannot fully benefit from the tax exemption in June, the reduction will continue into July and beyond. Local governments will begin issuing cash subsidies this summer for those likely not to receive the full exemption by the end of 2024. Additionally, for salaried workers, no residential tax will be levied in June, with the remainder collected in increments over the subsequent 11 months starting in July [para. 6].

This new fiscal stimulus plan was unveiled despite Japan’s economic indicators showing positive trends [para. 7]. Prime Minister Fumio Kishida's new economic stimulus plan, first revealed on September 25, 2023, focuses on raising wages and mitigating the effects of rising prices [para. 8]. The plan, amounting to ¥17 trillion (approximately $113 billion), exceeds prior expectations, and aims to boost the economy by ¥19 trillion over the next three years, equating to an annual economic growth of 1.2%. Part of this plan includes ¥3.5 trillion in income and residential tax cuts, which is the precursor to the current tax reduction policy [para. 9].

From a domestic political perspective, the plan aims to improve the Kishida Cabinet's approval ratings, which have been affected by the handling of inflation issues. While prices in Japan have surged at the fastest rate in decades, wage increases have not kept pace with inflation, resulting in reduced purchasing power and public dissatisfaction [para. 10].

Economically, Japan's recovery appears fragile despite the positive indicators. The economy has faced GDP contractions in both the third quarter of 2023 and the first quarter of 2024 [para. 11]. Real wages have been negative for 24 consecutive months, and private sector spending has declined for four straight quarters, highlighting weak consumer confidence. Additionally, business capital expenditures (excluding software) declined in the first quarter, and industrial output underperformed in April [para. 12]. Complexities in inflation data due to policy changes and a weakening yen continue to exacerbate the situation, raising significant concerns about sustained price increases [para. 13].

In conclusion, whether these stimulus policies, including tax cuts, can alleviate the inflation-induced financial strain on families and foster a sustainable cycle of wage and price growth, remains uncertain. The long-term effectiveness in uplifting private consumption and overcoming Japan's deflationary mindset is yet to be seen [para. 14].