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.