Business
Japan considering raising income tax threshold in fresh economic stimulus
Japan’s government said it would consider raising the basic tax-free income allowance in effective permanent tax cuts worth up to $51 billion, a step that could also help ease constraints on part-time workers amid intensifying labour shortages.
The government’s plan, contained in a 39 trillion yen ($253 billion) economic stimulus package announced on Friday, comes after the ruling coalition yielded to a push by a key opposition party whose cooperation is crucial for the coalition to stay in power.
If the income tax threshold is lifted from the current 1.03 million yen ($6,674) per year to 1.78 million yen as demanded by the opposition Democratic Party for the People (DPP), tax revenue would drop by 7 trillion yen ($45.36 billion) to 8 trillion yen, according to a government estimate.
While the new threshold level has yet to be discussed, policymakers say a full increase to 1.78 million yen is unlikely.
DPP argues that 1.03 million yen has also served as constraining student part-time workers as their parents lose a tax deduction treatment if their dependent minors earn beyond the level.
Daiwa Research Institute estimates that about 610,000 students currently voluntarily limit their working hours to avoid hitting the threshold.
An increase in the deduction threshold to 1.8 million yen would boost labour supply by about 330 million hours, workers’ compensation by 456 billion yen and increase private consumption by 319 billion yen, according to Daiwa estimates.
But critics are sceptical about the impact on labour supply, pointing out that there are other income barriers that prevent part-time workers from working longer.
Raising the income tax threshold would also keep Japan an outlier among advanced nations that had mostly phased out pandemic-mode stimulus.
“This is effectively a dole-out policy disguised as a labour issue,” said Saisuke Sakai, senior economist at Mizuho Research and Technologies.
“Japan’s goal of running a primary budget surplus in the next fiscal year would be absolutely impossible. With no one caring about the fiscal discipline, concerns about Japan’s debt could intensify among investors,” he added.
In the stimulus package, the government will spend 13.9 trillion yen from its general account to fund measures aimed at mitigating the impact of rising prices on households.
The focus will now shift to how to fund the budget.
JPMorgan said in a report to clients that it expects about 10 trillion yen in additional new government bonds for the latest package.
However, the outlook for the budget for the next fiscal year from April is growing unclear as the outcome of the discussions on the tax revision would impact tax revenue for the year.
In a news conference, Finance Minister Katsunobu Kato declined to comment on whether the government’s goal of a primary budget surplus next year can be achieved, saying there would be multiple factors in play.
Fixing tattered public finances has emerged as a more imminent task for Japan as its central bank moves to exit years of ultra-easy monetary policy that had kept borrowing costs ultra-low.
Japan’s public debt stands at more than twice the size of its economy, by far the biggest among industrialised economies.
The dollar steadied against major peers on Thursday, continuing its near paralysis of the past two days before more concrete announcements on tariffs from U.S. President Donald Trump.
A spate of central bank policy decisions are also due over the next week, with the Bank of Japan widely expected to raise interest rates at the end of a two-day meeting on Friday.
Rate decisions from the U.S. Federal Reserve and European Central Bank are scheduled for Wednesday and Thursday of next week, respectively.
The dollar index – which measures the currency versus six top rivals, including the euro and yen – was flat at 108.25, following two days of gains of around 0.1%.
On Monday, it tumbled 1.2%, its steepest one-day slide since November 2023, as Trump’s first day in office brought a barrage of executive orders, but none on tariffs.
So far this week, Trump has mooted levies of around 25% on Canada and Mexico and 10% on China from Feb. 1. He also promised duties on European imports, without giving details.
“President Trump has so far taken a less hostile-than-expected approach to China,” amid overall “softer-than-expected policies and tone on tariffs”, said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
At the same time, “we are cautious (that) risk sentiment remains fragile and can quickly turn sour if President Trump strikes a more aggressive tone.”
The Chinese yuan was little changed at 7.2812 per dollar in offshore trading .
Wall Street’s main indexes rose Wednesday, with the S&P 500 hitting an intraday record high thanks to strong Netflix earnings and a rally in tech shares.
Japan’s yen edged up about 0.1% to 156.40 with markets pricing 95% odds of a quarter-point hike on Friday.
The euro was flat at $1.0411. The ECB is widely expected to cut rates by a quarter point next week.
The Canadian dollar held steady at C$1.4386 against the greenback. The Bank of Canada is seen as likely to reduce rates by a quarter point next Wednesday.
The Mexican peso was little changed at 20.47 versus the U.S. currency.
Oil prices dipped in early trade on Thursday, extending losses amid uncertainty over how proposed tariffs by U.S. President Donald Trump on several countries would impact global economic growth and energy demand.
Brent crude futures fell 23 cents, or 0.3%, to $78.79 a barrel at 0135 GMT, while U.S. West Texas Intermediate crude (WTI) eased 18 cents, or 0.2%, to $75.26.
In its previous session, Brent futures settled at $79.00 in a fifth straight day of losses. WTI futures settled at $75.44 in a fourth consecutive day of declines.
Trump has said he would add new tariffs to his sanctions threat against Russia if the country does not make a deal to end its war in Ukraine. He added these could be applied to “other participating countries” as well.
He also vowed to hit the European Union with tariffs, impose 25% tariffs against Canada and Mexico, and said his administration was discussing a 10% punitive duty on China because fentanyl is being sent to the U.S. from there.
Meanwhile, estimates from an extended Reuters poll showed that on average U.S. crude oil stockpiles were expected to have fallen by 1.6 million barrels in the week to Jan. 17.
Gasoline stockpiles were estimated to have risen by 2.3 million barrels last week, and distillate inventories were likely to have gained 300,000 barrels.
The poll was conducted ahead of the American Petroleum Institute industry group’s report and another from the Energy Information Administration at 12:00 p.m. ET (1700 GMT) on Thursday.
European wind shares fell on Tuesday (January 21).
The reports were delayed by a day due to the Martin Luther King Jr. Day federal holiday on Monday.
Pakistan and Saudi Arabia have reaffirmed their commitment to further strengthening the bilateral economic ties for shared prosperity.
The commitment was expressed when Finance Minister Muhammad Aurangzeb met with his Saudi counterpart Mohammad bin Abdullah Al-Jadaan on the sidelines of World Economic Forum Annual Meeting in Davos.
Muhammad Aurangzeb highlighted the key reform measures undertaken by the Government to promote economic stability and sustainable growth.
He briefed him on structural reforms, fiscal discipline and regulatory improvements that have contributed to an improved investment climate in Pakistan.
Earlier, Aurangzeb met Anna Bjerde, Managing Director of Operations at the World Bank.
They discussed cooperation between Pakistan and the World Bank, with a particular focus on Pakistan’s macroeconomic stability.
The finance minister emphasized the government’s strong partnership with the Bank and expressed hope that the World Bank would continue playing a key role in the country’s socio-economic development.
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