Japan's Prime Minister Shinzo Abe speaks to reporters at his official residence in Tokyo September 8, 2015.Yoshikazu Tsuno/Pool/Reuters
Japanese Prime Minister Shinzo Abe is promising to forge ahead with deeper corporate tax cuts in his latest effort to bolster flagging business confidence and revive a stagnating economy.
But in a country where business has shown little inclination to boost investment and where at least 70 per cent of firm's companies pay no income tax, it's not much of an elixir.
Still, cutting one of the developed world's highest corporate tax rates (second only to the United States) to bring it closer to those of key Asian competitors has always been part of Mr. Abe's troubled reform agenda, known as Abenomics.
The reaffirmation of that pledge at an investment conference in Tokyo helped trigger a surge of stock buying, driving the Nikkei 225 index up 7.7 per cent Wednesday, its biggest single-day rally in nearly seven years.
Never mind that the Japanese parliament had already approved the first part of the tax reduction, which will bring down the corporate rate 3.29 percentage points over two years.
Japan's corporate levy is set to drop to at least 31.3 per cent by the start of the next fiscal year in April, 2016, and the Abe administration's goal is to get it below 30 per cent within five years.
"We will push forward in reducing the rate down into the 20s over several years, bringing it to a level that compares favourably in the international context," Mr. Abe declared.
"We will change Japan into a country that is able to keep growing. Placing the economy as my highest priority, I will move forward steadily, step by step, on the road map for achieving this goal."
On its own, a corporate tax cut in Japan is hardly going to reverse the country's slide.
But investors were desperate for any good news amid the gloom spreading across Asia from a troubled China.
Indeed, the Tokyo market surge followed a steep nosedive Tuesday (and we think North American markets have been volatile) that drove the Nikkei to its lowest point since February, as China's woes hit Asian markets and currencies.
At the same time as it cuts corporate taxes, Tokyo intends to broaden the tax base by imposing limits on allowances and other loopholes that enable small and mid-sized firms to make themselves unprofitable for tax purposes.
But many Japanese companies are finding profits elusive without any government help. And economists say that, even with the changes, Japan won't be competitive with such low-tax rivals as Singapore.
For at least one day, though, investors chose to focus on the mildly positive rather than dwelling on the latest downbeat dispatches from the economic front. These include a revised GDP figure for the second quarter, showing that the economy shrank slightly less than previously estimated – 1.2 per cent on an annual basis, instead of 1.6 per cent.
But most of the improvement stemmed from higher inventory buildup. Domestic demand remains flat and non-residential spending actually declined by more than the preliminary forecast. A sharp drop in exports stemming from lower Chinese demand and an unexpected decline in industrial production in July make it hard to find much reason for optimism about Japan's immediate prospects.
The upshot is that a new round of stimulus measures will soon be on the way, starting with further monetary easing by the Bank of Japan.
Poor Mr. Abe. Every time he wants to focus on security or other favourite parts of his agenda, he's dragged back to the reality of an underperforming economy and its uncomfortable dependence on a solid Chinese turnaround.