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Abe lifts lid on his third arrow of reform

Tokyo - Prime Minister Shinzo Abe unveiled a package of measures yesterday to boost 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 three-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 has been trailed in advance, is a step in the right direction, but want to see how they are fleshed out and implemented.

Private economists forecast that the plan could boost Japan’s growth rate by between 0.2 and 1.5 percentage points from its current level of around 0.5 percent. But they noted that it would take time.

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

He said it was possible, but difficult, for Japan to hit the 2 percent annual growth level the government says is needed to reduce its huge public debt.

Among the steps outlined is a cut in the effective corporate tax rate – among the highest in the world – to below 30 percent over the next several years, and a vow to reform the $1.26 trillion (R13 trillion) Government Pension Investment Fund in ways likely to reallocate more money to the stock market.

Abe’s reform package is a welcome move for the Bank of Japan, which has called for bold government action to help sustain a recovery fuelled by its massive monetary stimulus.

Many central bank officials say the key is implementation and Abe’s commitment to meet words with action, so companies feel confident enough to boost investment for the future.

Bank governor Haruhiko Kuroda has warned against cutting the corporate tax rate without securing an alternative source of revenue, given its mammoth public debt. In a nod to that need for balance, the tax plan will seek to offset the cuts by broadening the tax base.

Key details of many steps have been left to be worked out later and several bold but politically contentious plans were watered down or omitted. By dribbling out key elements in recent weeks, the government hopes to avoid the blow that led to a sharp drop in share prices last June when Abe announced the first instalment of his “third arrow”. – Reuters

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