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By Rie Ishiguro
TOKYO (Reuters) - Japan's new government on Friday pledged to slash corporate tax to meet its economic growth target of 2 percent in the coming decade that many economists said was too ambitious.
In the short term, the government said it aimed to defeat deflation that has plagued the country for much of the past 20 years within two years, setting a timeframe for the first time, and called upon the Bank of Japan to "do its utmost" to help with the task.
The government unveiled its growth strategy less than a week before it is due to announce plans on how to tackle its massive debt and ahead of upper house elections on July 11, and is hoping to win the public's confidence in its ability to steer the world's second largest economy.
By stimulating demand in clean energy and other areas with growth potential, the government aims to lift real economic growth to more than 2 percent on average and nominal growth to 3 percent over the next 10 years.
But the plan met with scepticism from some investors.
"The growth targets don't sound like anything new to me, just wishful thinking," said Junko Nishioka, chief economist Japan at RBS Securities.
Nishioka said the growth targets, outlined by the government in December, will be hard to meet given that Japan's real growth rate hovered at 1.3 percent on average in the decade before the global financial crisis.
Prime Minister Naoto Kan, who has made fiscal reform a top priority since taking office last week, said on Thursday that "without a strong economy, strong public finances and a strong social security system would not be possible".
He said that doubling the 5 percent sales tax was an option to curb the country's massive debt, that is about twice the size of the economy.
The government also said the effects of policies for boosting demand and jobs would be maximised if the public shoulders the costs of expanding social welfare.
Economists say the government needs to commit to raising the sales tax to 15 percent or even 20 percent over the next 10 to 15 years to pay for rising social welfare costs and a commitment to hike tax is needed to make its fiscal plans look credible.
But National Strategy Minister Satoshi Arai, in charge of both growth strategy and fiscal plans, said Friday there will likely be no mention of sales tax in the fiscal plans, which are expected to come out on June 22.
Kan told reporters on Friday evening a sales tax hike to 10 percent would be necessary to largely cover growing social welfare costs for the elderly. He did not specify the reasoning behind the proposed scale of the tax increase on Thursday.
WANTS BOJ EFFORTS ON DEFLATION
The government in its economic growth strategy called on the Bank of Japan to "do its utmost" to beat deflation and said fiscal and monetary policies for ending price falls should help the country avoid excessive rises in the yen.
It will aim to achieve a rise in core consumer prices, which marked their 14th straight month of annual decline in April, in the next two years, although the plan lacked specific policies on how it would achieve it.
The BOJ has forecast that core consumer prices would rise slightly in fiscal 2011/12, while predicting 2.0 percent economic growth for the same year, quicker than 1.8 percent estimated for this fiscal year.
The government also pledged to lower the country's corporate tax rate aimed at luring foreign businesses and lifting corporate spending in Japan.
It said it would slash the tax rate, now around 40 percent and the highest among G7 countries, by stages to the rates in major countries, or around 25 percent. But it stopped short of setting a time frame.
Italy has the lowest corporate tax rate in the G7 at 27 percent while the United States is at 39 percent, according to the Organisation for Economic Co-operation and Development as of 2009.
It also plans capitalise on fast-growing demand in Asia by focusing on infrastructure among other sectors.
The government will consider incentives to attract overseas companies and to set up industrial zones.
Japan will show its growth strategy and its fiscal reform plan at a June 26-27 G20 summit in Canada.
Japan's economy pulled out of the worst recession in decades in April-June last year and its growth in the first quarter of this year outpaced that of Europe and the United States.
On Friday, the government upgraded its economic assessment for the first time in three months, pointing to signs of a self-sustaining recovery.
(Editing by Kazunori Takada)
(For more business news on Reuters India click http://in.reuters.com)
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