Japan's ruling coalition endorsed a tax reform plan Friday for fiscal 2022 that will see an expansion in efforts to encourage companies to raise wages in line with Prime Minister Fumio Kishida's cherished policy of pursuing wealth redistribution to households and economic growth.

But many analysts predict the effect of tax breaks for companies aimed at pushing up basic salaries of their employees will likely be limited.

Prime Minister Fumio Kishida attends a House of Councillors plenary session at the parliament in Tokyo on Dec. 9, 2021. (Kyodo)

They believe the planned tax deductions will be non-permanent and insufficient to change the course of wages in Japan being almost flat over the last 30 years, saying that more needs to be done such as rolling out a measure designed to improve labor productivity if the government is serious about its policy goal.

"Since the tax cuts are temporary, I believe the policy is unlikely to induce a hike in wages, especially in basic salaries that will increase fixed costs for companies," said Koya Miyamae, a senior economist at SMBC Nikko Securities Inc.

Kishida, who took office in early October and led the Liberal Democratic Party to victory in a general election late that month, has vowed to revive the economy hit hard by the coronavirus pandemic by redistributing wealth to the middle class through pay hikes.

Increasing tax incentives for companies that raise wages was among the LDP's campaign pledges of the lower house election, although no details were available at that time.

Under the envisaged tax system reform, big companies that raise annual salaries more than 3 percent from a year before will qualify for corporate tax deductions of up to 30 percent, compared with the current 20 percent.

The maximum deduction rate for smaller firms will be 40 percent from 25 percent. For both large and smaller businesses, the deductions will apply to their year-on-year wage increases.

The conditions to be eligible for the carrot-and-stick tax policy will be tougher for big companies, which need to raise wages by at least 3 percent for all employees except for newly hired people, instead of 2 percent for new workers under the current system.

The policy will be provisional, only applicable for two years from fiscal 2022 starting in April.

"For firms that had been considering a pay hike, the tax advantage is indeed a blessing, so I wouldn't say the policy has no effect at all. But from the point of view of national finance, it may be a waste," Miyamae said.

The annual tax reform plan will be submitted to the Diet early next year, after getting approval from the Cabinet later this month.

Late November, Kishida said at a government panel meeting that he hopes companies seeing their earnings recover to pre-pandemic levels will raise employee wages by "more than 3 percent" next spring.

It was extraordinary for the LPD-led government, which has demanded a pay hike since 2013, to mention a specific numerical target.

Moreover, the government has promised to raise monthly salaries of care workers, nursery school staff and nurses by 1 to 3 percent from current levels.

Corporate managers seem to have taken Kishida's policy positively.

Yoichi Miyazawa (R), head of the ruling Liberal Democratic Party's tax commission, and his counterpart Makoto Nishida of the junior coalition partner Komeito pose for a photo on Dec. 10, 2021, at the parliament in Tokyo. (Kyodo)

In a survey conducted in mid-November by Teikoku Databank Ltd., 802, or 48.6 percent, of the 1,651 companies that responded said they will raise wages regardless of the scale of tax breaks.

Should tax incentives be widened, 8.5 percent of the firms said they would raise wages and 22.3 percent said they would consider raising them. If those two figures were added, "79.4 percent of the total were positive" regarding wage hikes, the credit research firm said.

Miyamae expects more companies than before will apply for the tax reductions for increased wages as business activities gradually resume with the number of new COVID-19 cases continuing to remain low in Japan.

"Amid the business resumption, the longtime labor shortage on the back of the country's rapidly aging population has been getting serious again," he said.

Japan has long seen no significant growth in wages. Its average annual earnings in purchasing power parity stood at $38,515, up 0.4 percent in 20 years through 2020, while those for the Group of Seven industrialized nations averaged $49,642, up 14.3 percent, according to data of the Organization for Economic Cooperation and Development.

A number of economists cite Japan's lower productivity as one of the major reasons for the decades-old pay stagnation, with the OECD data showing gross domestic product per hour worked was $48 for Japan last year, remaining the worst among the G-7 countries.

"Companies can raise wages because their profits and productivity are growing. It is unreasonable to try to increase pay while productivity remains low," said Hideo Kumano, executive chief economist at the Dai-ichi Life Research Institute.

To raise wages, Kumano said, the government's economic stimulus should include more steps that would help small and mid-sized firms enhance productivity and boost exports.

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Japan gov't sets FY 2022 tax plan focused on incentives to hike wages