International Monetary Fund (IMF) staff has pitched before Japanese authorities a slew of fiscal proposals including clarity on corporate tax incentives.

According to IMF staff report dated 10th February 2020, "A clear government commitment is needed for more effective corporate tax incentives for wage increases, higher minimum wages, and an increase in administratively-controlled wages and social transfers. To support reflation, administered prices should be set by a mechanism that better reflects costs, with safeguards for low-income households".

Referring to 2% increase in consumption tax in October 2019, the Report notes that Japan faces significant risks. A major domestic risk is "a sharper and more-protracted fall in consumption in the wake of the consumption tax rate increase is an immediate downside risk".

The Staff thus believes that a broadly neutral fiscal stance is appropriate for 2020 and could, if warranted, be extended to 2021-together with continued monetary accommodation.

The Report says: "The increase in consumption tax revenue is expected to be largely offset by expenditure increases and revenue losses from the mitigating measures, making the 2019 fiscal stance broadly neutral. The December 2019 stimulus package is projected to make also the 2020 fiscal stance broadly neutral, while the 2021 fiscal stance would be contractionary (by about 0.6 percent of GDP) under current policies as the effects of the package fade".

The Report adds: "Given downside risks and the need to avoid a pro-cyclical fiscal tightening that might undermine growth momentum, a neutral fiscal stance might also be called for in 2021, unless economic data outturns are stronger than expected".

The measures taken by the Government to cushion the impact of increase in consumption tax included: (i) a point-reward program for cashless payments in small and medium enterprises; (ii) a tax allowance for automobile and house purchases; (iii) infrastructure investment; and (iv) additional spending for childcare and tertiary education.

Staff wants authorities to consider the option to extend consumption tax counter-measures in 2020. Some key measures to cushion the impact of the October 2019 consumption tax rate increase are set to expire before the end of 2020, while economic activity is expected to soften post-Summer 2020 Olympics.

The Report says: "Alternatively, an exit strategy from those measures should be carefully designed to minimize volatility of private consumption and cushion any impact on the most vulnerable. For example, as the point reward program carries the potential to make private consumption volatile when the measure expires in June 2020, the authorities could instead phase out the reward rate towards the end of 2020, or replace the program with another measure that carries a similar economic impact".