Japan's tax cut plan leaves industry asking for more

Japanese business gave a guarded welcome on Tuesday to the cash-strapped government's plan to cut corporate taxes, saying more support was needed to help them create jobs and compete with regional rivals.

Prime Minister Naoto Kan gave orders on Monday for a 5 percentage point cut in the tax rate from the year starting next April, saying it would enable businesses to increase domestic investment, boost jobs and raise salaries.

But executives, especially in the auto and electronics industries, say their firms will still lose out to South Korean competitors unless the government provides tax breaks for research and capital investment, helps combat the strong yen and makes progress on free trade deals.

Japan's biggest business lobby, Nippon Keidanren, said it expects further tax cuts.

We see this as the first step in the government's growth strategy that aims to reduce the effective corporate tax rate to the level of other developed nations, Keidanren Chairman Hiromasa Yonekura said in a statement.

Cutting the tax rate to 35 percent from 40 percent would still leave it higher than 28 percent in Britain, 29.4 percent in Germany and 24.2 percent in South Korea, which is gaining overseas market share in cars and electronics at Japan's expense.

Yonekura said in his statement corporations would act to boost domestic investment and work to create jobs as the government's growth strategy became a reality.

But many Japanese companies are more inclined to invest abroad as they try to reduce reliance on the home market, doing little to reduce the 5.1 percent jobless rate.

NO CAST-IRON GUARANTEE

Implementation of the tax plan is not guaranteed because the ruling Democratic Party needs the support of opposition parties to pass laws, due to a split parliament. The issue of how to fund the move is also yet to be resolved.

It's only halfway to the goal, said Naoki Kamiyama, an equity strategist for Deutsche Securities in Tokyo, adding that the effect on the stock market would in any case be minor.

A straightforward 5 percent reduction would likely result in an 8 percent jump in the Topix index <.TOPX> of all first-section shares on the Toyko stock market, but the removal of exemptions in other areas of corporate tax could mean a net reduction of only 1 percent, he explained.

The stock market could see a gain of 1 percent, little more than its daily volatility, Kamiyama said.

Some top executives have made no secret of their dissatisfaction with the government's business policies.

I am totally disappointed. As a Japanese person I am ashamed, the president of camera and endoscope maker Olympus Corp <7733.T> told Reuters in an interview last month.

We want them to do something about corporate tax right away. It shouldn't be just a tight-fisted 5 percent, but much bigger, Tsuyoshi Kikukawa said, adding that the government should also work more closely with industry on overseas sales drives.

Fumio Ohtsubo, president of electronics giant Panasonic Corp <6752.T>, also called on the government in an interview last week to help create a level playing field for Japanese corporations. which he said suffered a range of disadvantages compared with their South Korean counterparts.

(Additional reporting by Tim Kelly and Taiga Uranaka; Editing by Michael Watson)