` ` Edition 01/2018 EPA and TPP 11, Japan will become open to foreign trade On December 8 the EU and Japan announced the successful conclusion of the negotiations regarding the Economic Partnership Agreement (EPA). With regard to the apparent protectionist tendency of recent times, the signing of the EPA (Economic Partnership Agreement) between the EU and Japan has shown a political will for the free, fair and open foreign trade system worldwide. Therefore, in addition to the Japan-EU Strategic Partnership Agreement (SPA), this agreement not only serves to further deepen the economic relationship of both countries, but should also have some impact on shaping world trade in the future. Approximately 11% of total Japanese exports go to the EU, making the EU one of the most important trading and investment partners for the Japanese economy. With the EPA agreement, the huge free trade zone will consist of a population of about 640 million, whose GDP corresponds to a world share of about 28% and a trade volume of about 37%. Population (2016) GDP (2016) External trade (2016) (Export+Import) Japan + EU = 8,6% Japan + EU = 28,4% Japan + EU = 37,2% Japan Japan EU Outside 1,7% Japan 3,9% 6,9% USA the EU 6,6% 4,3% 12,0% EU Other Other 32,0 21,8 China 39,8% % % Within 18,5 the EU % 21,2% Other 68,6 China USA China USA % 14,9 24,7 11,6% 11,4% % % (Source: Ministry of Foreign Affairs of Japan) Furthermore, on January 23 trade officials from eleven countries participating in the Trans-Pacific Strategic Economic Partnership Agreement (TPP), excluding the United States, held a meeting in Tokyo. The 11 members of the Trans-Pacific Partnership will sign a new pact without the United States on March 8 in Chile. TPP 11 will be taking effect in 2019 if domestic procedures go smoothly. It is an economic zone that accounts for 13% of the world's GDP scale and 6.7% of the world's population. U.S. President Donald Trump said on January 25 he would rejoin the Trans-Pacific Partnership trade deal, which he decided to exit back in January 2017, if "we made a much better deal than we had." JAPAN Contact: Heiwa Hasegawa, Representative Telephone: +81 3 5276 6632 Fax: +81 3 5276 2455 E-mail: [email protected] VDMA-Newsletter “Japan”, Edition 01/2018 Contact: Oliver Wack, Telephone: +49 69 6603-1444 2 Japan Economic and Industrial Scenario, 01/2018 VDMA JAPAN Liaison Office Current Economic Scenario Machine tools: robust in 2017 and positive outlook for 2018, although labor shortage worsening In the early days of January, the major associations of engineering companies held a succession of information sessions at Tokyo hotels. All of the sectors reported strong economic performance. Last year’s high demand from China has carried into the new year, and there is healthy demand for capital expenditure on productivity improvements. In these circumstances, year-on-year growth in the range of 10%-20% was recorded. On the other hand, there was frequent mention of the increasingly severe labour shortage, underlining the need to accelerate the government’s ‘connected industry’ initiative. A heightened sense of crisis caused by Japan’s (Photo source: VDMA Japan) successive years of low productivity is felt not only by officials of the Ministry of Economy, Trade and Industry (METI), but throughout industry. According to the Organisation for Economic Cooperation and Development (OECD), the value of GDP generated per hour in Japan in 2016 was $41.5. By comparison, one hour of labour in Germany generated $59.8. approximately 44% higher. Furthermore, Germany also had the shortest working year of any OECD country, with 1,364 hours; a stark contrast to Japan’s 1,713 hours. It is questionable whether Japan’s labour productivity can be increased as the Abe government proposes with its call for a ‘productivity revolution’ and ‘working revolution’ to redress the work-life balance. International comparison of labor productivity per worker 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Japan USA Germany France Canada England Source: Japan Productivity Center **The Japan Productivity Center announced on December 20, 2017 that one of hour of labour in 2016 generated $46 (¥4,954) of GDP, an increase of 1.2% over the previous year. METI and EU; increased export support and expert advice METI and the EU have signed the European Partnership Agreement (EPA) which provides more support for small and medium enterprises to export to the EU. Small and medium enterprises entering the EU or expanding their product range may now receive support from attorneys, trade expert and other advisers. VDMA-Newsletter “Japan”, Edition 01/2018 Contact: Oliver Wack, Telephone: +49 69 6603-1444 3 Japan Economic and Industrial Scenario, 01/2018 VDMA JAPAN Liaison Office The objective of the support is the 6,677 member companies registered as small or medium enterprises in the JETRO consortium of new exporters, in addition to the more than 1,000 companies who are expected to receive support under the Trans Pacific Partnership (TPP) for exporting to the member countries. The supplementary budget of ¥2 billion allocated in FY2017 is expected to be increased to provide support for an additional 1,000 companies exporting to the EU. The consortium will receive support from JETRO (The Japan External Trade Organisation) and through chambers of commerce in the form of assistance with formulating overseas expansion plans, market research, provision of industry experts and veterans, on-site negotiations, etc. The EU has a more advanced legal structure than many Asian countries, which are members of the TPP. Without expert advice, it is difficult to comply with procedures for such measures as obtaining the CE safety mark, or with restrictions on retail land use, for example. METI will appoint approximately 500 such experts, and will also secure the services of former industry experts from major companies and consultants to support exports to the EU. (Nikkei Shimbun, 21.12.2017) Tax reform in 2018 International competition to lower tax rates is becoming more severe as globalisation continues. Restricting domestic tax rates attracts foreign capital, leading to growth in the home country. Japan’s effective rate of corporate tax has fallen from 37% in FY 2013 to 29.97% in FY 2017, and is expected to fall further from its FY 2018 rate of 29.74%. In addition, a number of measures are being introduced to encourage capital expenditure on increased productivity. ■ Domestic investment (wages, capital expenditure) accelerating The government is urging businesses to raise wages by 3% and increase capital expenditure, as Japan achieves record high levels of corporate earnings. It is planned that companies that do this will have their corporate tax reduced to the OECD average of 25%. Companies that invest vigorously in IoT to improve productivity will have their corporate tax reduced further to 20%. Applicable period： 3 years until end of 2020 2017 Income expansion promotion Tax reform in 2018 taxation (large enterprise) A wage increase above a certain level and domestic capital investment A wage increase above a certain level ① Wage increase rate 3% or more ① Total amount of salary: more than a ② Domestic capital investment ＞ 90% of Requirement certain amount since 2012 depreciation expenses ② Total amount of salary > previous fiscal year > Strengthen support for companies which invest ③ Wage increase rate 2% or more actively in human resource (for example companies increased cost of education and training program) 15% of the incremental amount since from previous year (20% of corporate tax amount as 10% of the incremental amount of maximum) tax credit salary since 2012 (10% of corporate tax 20% for companies which invest actively in amount as maximum) human resource ( 20% of corporate tax as maximum) Source: METI ■ Boost for investment by SMEs For new capital investment, a special provision will allow the tax on fixed assets to be reduced from one half to zero for the 2018-2020 financial years in the following cases. ① SME capital investment implemented in accordance with city, town or village planning ② Direct capital investment which directly achieves the target of the productivity revolution (investment in equipment which raises average labour productivity by 3% or more) ③ Capital investment leading directly to increased profitability VDMA-Newsletter “Japan”, Edition 01/2018 Contact: Oliver Wack, Telephone: +49 69 6603-1444 4 Japan Economic and Industrial Scenario, 01/2018 VDMA JAPAN Liaison Office Reduction of corporate effective tax rate and international level OECD average 24.78% Asien average 21,7%* Source: METI ■ Stronger structure for IoT capital investment (Connected Industries tax treatment) A special depreciation of 30% or a tax deduction of 3% (or 5% if accompanied by a wage increase) will apply to the purchase of certain systems, sensors, robotics and other capital investment related to cyber and data security and productivity improvements. Any company seeking to apply this treatment must submit the investment plans to the Ministry and obtain approval. The provision is available until the end of 2020. To be eligible, investments must have as their objective a 2% or higher yearly increase in productivity or a 15% or higher yearly return on investment. ■ Promoting faster and larger corporate re-structuring (M&A) pace and scale increasing Measures are being prepared to defer tax on share transfers on M&A activity in Europe and North America in order to help companies quicken and enlarge their portfolio restructuring to adapt them for Industrie 4.0.