Kaori Kaneko, Tetsushi Kajimoto

TOKYO (Reuters – Japan won’t give tax breaks for big corporations that raise wages. Instead, it will increase deductions for companies that do. This is part of Japan’s efforts to boost salaries.

Prime Minister Fumio Koshida emphasizes the importance of distributing wealth to families through his carrot-and stick approach. This includes urging companies whose profits are back to pre-pandemic levels for 3% pay increases.

Yoshimasa maruyama, chief economist of SMBC Nikko Securities said: “I don’t think the tax measures are going to immediately prompt Japanese companies to increase wages since they only recently raised pay.”

“Still the latest move shows that the government is forced to take action in order to stimulate a positive economic cycle with large wage rises and long-term inflation.”

The Liberal Democratic Party-led government in Japan has been putting pressure on Japanese companies to use their huge cash reserves to increase wages since it was elected to power late 2012. Many of them, however, have refused to spend their record cash piles in the face economic uncertainty.

According to Reuters, large companies who raise their wages by 4% over the previous year will be able to deduct up to 30% from their taxable income.

According to the tax reform plan, small businesses that increase wages by 2.5% or more will qualify for a 40% tax deduction.

The same thing is true for companies that do not raise wages. They will be unable to take tax deductions when they spend on areas like research and investment, promoting investments, 5G and digital transformation, and carbon neutrality.

For Japanese companies, which offer pay increases up to 4% at their annual wage negotiations with unionists in the past years, this would represent a substantial increase.

OECD data shows that Japanese wages have remained largely the same over 30 years. Japan has suffered “lost decades”, and deflation.

Expect Kishida’s Liberal Democratic Party, (LDP) as well its alliance ally Komeito to support the tax cut plan on Wednesday. On Friday, the parties are likely to vote on the complete tax reform plan.

This plan will be the foundation for the government’s fiscal policy beginning in April 2022.

Corrects the translation from paragraph 3 by an analyst to show that wages have been raised recently.