Japan will reduce its corporate tax rate by five percentage points to 35% in April, in an effort to boost the country's ailing economy.
Naoto Kan, the country's prime minister, ordered the cut after weeks of political debate with one government department suggesting that a 25% rate is the ultimate target.
The cut is aimed at encouraging investment and reducing the tax burdens facing businesses in Japan.
The reduction will form part of wider tax changes which include reforming various tax preferences, such as the carry forward of tax losses, and other steps to widen the tax base to pay for the cut in the corporate tax rate.
"The general reaction from the market is positive," said Yushi Hegawa of Nagashima Ohno & Tsunematsu. "It will enhance the international competitiveness of Japan compared to other countries like Korea."
In November, the Ministry of Economy, Trade & Industry stated that the country's 40% corporate tax rate should be reduced to 35% by 2011 and then to a rate of between 25% and 30% in the future.
"I won't see a 25% rate in my lifetime. It has taken months to cut the rate by five points so a 25% rate is just unrealistic," said Hegawa.
Kan's tax reforms were touted as the reason why he suffered heavy losses in elections for the upper house of Parliament last July.
The prime minister, who took office last June after the sudden resignation of his predecessor, lost his upper-house majority, his Democratic Party of Japan winning 44 seats compared with 51 for the opposition Liberal Democrats.
Last year, Kan proposed a doubling of the country's consumption tax rate from 5% to 10% to help reduce the country's deficit and to kick-start a stagnant national economy.
He then released a fiscal plan that capped public spending at ¥71 trillion ($797 billion) over each of the next three years and included a series of tax reforms.
"The problem is that support for Kan and his party has been low, and they cannot propose to increase the consumption tax rate, which is necessary to fundamentally improve Japan's financial condition, for fear that they would further lose popularity among Japanese voters," said Akihiro Hironaka of Nishimura & Asahi.
The country's tax committee will also consider extending the period to allow carry forward losses from the current seven year period. Instead an annual restriction on the amount of the loss that could be set off would be introduced. This is expected to be 50% of a company's net operating losses.
