Prime Minister Shinzo Abe is determined to cut Japan's corporate tax rate, Chief Cabinet Secretary Yoshihide Suga said, a step experts say could boost the global competitiveness of Japanese companies and make the country more attractive to foreign investment.
Suga, who serves as the government's top spokesman and is one of Abe's most trusted aides, also said Japan's participation in talks on a U.S.-led free trade pact, the Trans-Pacific Partnership, was a vital part of Abe's growth strategy, the "Third Arrow" in his "Abenomics" policy that also includes hyper-easy monetary policy and fiscal spending.
"The prime minister has made a definite statement regarding a reduction in the corporate tax rate," Suga told Reuters in an interview. "We want to achieve this."
Finance ministry officials have expressed concern that cutting the corporate tax rate, considered high by global standards at about 35 percent for national and local taxes combined, would worsen the public debt, which is already the worst among advanced nations.
But Suga said: "Whatever the finance ministry says, the government policy will not change. We will consider what will happen to government finances if the corporate tax rate is lowered, but the prime minister has said all along that a reduction is necessary. We want to do that properly."
Abe took office in December 2012 pledging to revive the economy and end the deflation that has plagued it for a decade and a half.
Suga said that nearly 14 months later Japan was on track to escape deflation.
"Without a doubt, we have been able to create the atmosphere such that we can escape from the deflation that has continued for 15 years," he said.
"I think that we are a cabinet that will achieve the two extremely difficult (goals) of escaping deflation and rebuilding the government finances," he added.
He said the real test would come after the government raised the 5 percent sales tax to 8 percent in April.
"Without a doubt, the critical time awaits us after the sales tax rise," he said.
Another rise to 10 percent is scheduled from October 2015.
TRUST IN KURODA
Suga said it was up to the Bank of Japan to decide whether further monetary easing would be needed if the economy struggles after the April sales tax hike.
"With regard to monetary policy, Bank of Japan Governor (Haruhiko) Kuroda shares the Abe government's way of thinking so we want to trust him and leave it to Governor Kuroda."
The Bank of Japan launched an intense burst of monetary stimulus last April, when it pledged to accelerate inflation to 2 percent in about two years with aggressive asset purchases.
The central bank is likely to stand pat on monetary policy next week, but is hardly complacent. With a global recovery still fragile, Japanese companies are wary of boosting wages and capital spending enough to compensate for a slump in household spending expected after the April tax rise.
Investors have mostly applauded the first two "arrows" of Abe's economic prescription, but have been disappointed by the growth strategy, including a perceived lack of progress in key areas such as labour market reform.
Asked about such views, Suga noted that deregulation and other structural reforms generally needed legal changes, but said he wanted to show the direction on changes in key sectors of labour, medical care and agriculture by the end of June.
He added that Japan's participation in the TPP talks was a vital part of the growth strategy.
"From here on, I think that the 'arrow' with the longest flight time will be TPP," he said.
Japan and the United States are holding high-level talks in Washington this weekend in search of a two-way compromise ahead of a meeting of ministers from the 12 participating countries in Singapore later this month.
A key sticking point is Japan's desire to maintain tariffs on politically sensitive agricultural products such as rice.