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Japan ruling party approves corporate tax cuts, urges firms to invest more

[TOKYO] Japan's ruling party approved a plan on Thursday to slash the corporate tax rate to below 30 per cent from April and trim it again the following year, while pressing companies to boost investment and raise wages to spur economic growth.

The plan, to be included in the annual tax code revision, will bring the effective corporate tax to 29.97 per cent - in line with that of Germany - in fiscal year 2016 that begins in April.

It will be reduced further to 29.74 per cent in fiscal 2018.

Japan's corporate tax is now 32.11 per cent, well above the average 25 per cent among OECD economies, putting its firms at disadvantage against overseas rivals.

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Prime Minister Shinzo Abe brought forward the plan to cut the tax below 30 per cent by one year, hoping that it will help Japanese firms become competitive and encourage them to spend some of their cash piles for investment as capital spending is slow to grow. "We strongly ask the business circles to make more efforts to ensure a virtuous economic cycle," the Liberal Democratic Party (LDP) said in its tax code revision, which is expected to be endorsed by its small coalition ally Komeito later in the day.

The cabinet will need to approve the revision before sending it to parliament in January.

Big firms have been reluctant to ramp up capital expenditures even though corporate internal reserves exceed 350 trillion yen (S$4 trillion). Workers' share of corporate income has declined, though companies are moving to raise wages, the LDP said. "We are at a critical stage where corporate management must change their mindset to make use of internal reserves for actively expanding investment and boosting wages," it added.

Data this week showed Japan barely dodged a recession in the third quarter, but policymakers will remain under pressure to speed up growth with additional stimulus measures.