WITH consumer spending expected to fall after Japan's sales tax goes up next April, Prime Minister Shinzo Abe is putting a five trillion yen (S$63.4billion) stimulus package in place and also removing a surcharge on corporate taxes to encourage companies to boost wages.
On Tuesday, Mr Abe will officially announce the sales tax increase from 5 to 8 per cent, along with details of the stimulus.
While additional revenue from the higher tax will help rein in the government's massive debt, the Prime Minister must ensure the expected fall in consumer demand immediately after the increase does not tip the economy into another recession.
The package is likely to include cash handouts for low-income earners and pensioners, additional public works projects, and tax breaks on capital expenditure spending.
Besides the stimulus, Mr Abe wants to encourage Japanese corporations to raise wages by lightening their tax burden.
Japanese companies now have to pay a 10 per cent surcharge on their taxes to fund reconstruction work in areas hit by the 2011 earthquake and tsunami disaster.
Mr Abe plans to remove the surcharge next March, one year ahead of schedule. This will effectively lower the corporate tax rate from 38 to about 36 per cent, still higher than that in many industrialised countries and more than double Singapore's 17 per cent.
Business leaders welcomed the move.
Mr Hiromasa Yonekura, head of the powerful Nippon Keidanren business lobby, hailed it as an "important first step" to helping Japanese companies be more competitive internationally.
"We can expect the tax cut to boost corporate earnings, which in turn allows companies to increase capital investments, improve employment and also raise wages," he said on Tuesday.
Mr Abe has pledged that reconstruction work will not be affected by the 900 billion yen in revenue shortfall resulting from the removal of the tax surcharge as it will be covered by surplus funds in this year's national budget.
Although many in Mr Abe's ruling party argue that it would be unfair to raise the sales tax for consumers while cutting taxes for corporations, they are unlikely to be able to over-rule the popular Prime Minister.
"It is important that the measure be seen as benefiting the people equally," he told reporters in New York, where he is attending the United Nations General Assembly.
If Japanese companies raise wages, he stressed, this will ensure that more people will benefit from the economic recovery.
He added higher wages are necessary to end 15 years of deflation, which he hopes to lick by 2015.
Last week, Mr Abe kicked off a series of meetings with major business organisations and labour unions to drive home the need to end deflation and to convince companies to pay workers more.
Many companies are willing to give bigger one-time bonuses but not raise monthly salaries which are difficult to cut back later.
The Prime Minister has also told Finance Minister Taro Aso to work out a medium to long-term plan that will bring the corporate tax rate more in line with those of other industrialised countries.
The government is also due next month to identify strategic economic growth areas as part of Mr Abe's growth strategy.