Bloomberg News

Japan Vows Tax Cuts for Foreign Firms to Spur Quake Rebound

October 19, 2011

(Adds Lawson CEO’s comment in 18th paragraph.)

Oct. 19 (Bloomberg) -- Japan unveiled an initiative to lure foreign investment to its devastated northeast as economists, investors and corporate leaders urged stronger steps to support business and restore economic growth.

National Strategy Minister Motohisa Furukawa said at a Bloomberg conference in Tokyo today that foreign companies setting up new operations in areas hit by the March 11 earthquake and nuclear disaster won’t have to pay tax for five years. At the same gathering, Lawson Inc. Chief Executive Officer Takeshi Niinami said Japan needs to push for free trade to spur anti-protectionist sentiment in the region while doing more to back domestic firms.

Today’s commitment from Furukawa is one of the strongest signs yet that Prime Minister Yoshihiko Noda’s administration sees foreign trade and investment as a key contributor to Japan’s rebound from three straight quarters of economic contraction. Noda’s cabinet has pledged to make a decision “soon” on whether to proceed with free-trade talks in the U.S.-led Trans-Pacific Partnership forum.

Japanese leaders must “push for more free trade, push for the TPP,” something that may pressure China to also embrace trade liberalization, said Gerald Curtis, a Japanese politics professor at Columbia University in New York.

Nuclear Backlash

Furukawa, 45, said Japan must lead other countries facing similar challenges to economic growth as it struggles to rebuild. The magnitude-9 temblor and tsunami left about 20,000 people dead or missing, caused an estimated 16.9 trillion yen ($220 billion) in damage and triggered the world’s worst nuclear accident since Chernobyl, sparking a backlash against atomic energy.

“We want to aggressively welcome foreign vitality,” Furukawa said. “We’ve decided to virtually eliminate corporate taxes for firms that set up new operations in the special recovery zone, including foreign firms.”

The government announced the tax measures earlier this month without specifying whether overseas companies were eligible. Naoki Iizuka, a senior economist at Mizuho Securities Co., called the tax breaks a “very positive step” that should be extended from the disaster-struck region to the entire country.

‘Hollowing Out’

The government is compiling measures this week to help companies cope with a strong yen that risks a “hollowing out” of industry as firms relocate abroad, Furukawa said. Noda is preparing to present a third stimulus plan of 12.1 trillion yen to parliament this month to help rebuild. The Diet has already approved two packages totaling about 6 trillion yen.

Furukawa, a former Ministry of Finance official, said Japan wants to “strategically” promote free trade accords, without proving specifics.

In an interview last year he said Japan must “open the country” to free trade or risk continued stagnant economic growth and high unemployment.

While no fixed timeline for becoming part of the TPP trade talks has been set, Noda’s Democratic Party of Japan is aiming to reach a decision ahead of the Asia-Pacific Economic Cooperation summit in Hawaii on Nov. 12-13.

Japan’s currency has risen 5.8 percent so far this year against the dollar and touched a postwar high of 75.95 yen on Aug. 19. Nissan Motor Co. chief executive officer Carlos Ghosn said this month the yen’s appreciation threatens to derail a rebound in the nation’s economy.

‘Business First’

Japan’s political leaders should do more to advocate for companies doing business in countries such as China and avoid comments that can stir-up historical animosity, Lawson’s Niinami said.

“Do not talk about history,” he said. “Always business first.”

Japan’s need to take effective measures to boost growth is underscored by the changing balance of power in the region, Columbia’s Curtis said.

“How do you balance China’s growing political and military power so you’re not at the mercy of Chinese policy and demands?” he said. “The most important factor is to have a stronger economy.”

--Editors: Patrick Harrington, John Brinsley

To contact the reporters on this story: Patrick Harrington in Tokyo at pharrington8@bloomberg.net; Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net


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