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TOKYO (Reuters) - An economic plan being prepared by Japan's government commits it to "corporate tax reform", but resistance from fiscal hawks prevented it from specifying a cut in the tax rate in an outline it released on Monday.
Prime Minister Shinzo Abe says he wants to cut the corporate tax rate, among the highest in the world, to spur business activity - a pledge that is a focus for investors seeking to gauge how strong his policies will be for economic growth.
But the outline of his policy priorities indicated that the issue of corporate tax reform was still "pending" and under discussion by officials, who also need to find ways to curb a public debt burden that, at more than twice the size of the economy, is the world's heaviest.
Japanese economy minister Akira Amari said a tax panel set up by Abe's Liberal Democratic Party would need to "iron out differences" on a corporate tax cut.
"There was not much debate here at this stage," Amari told reporters after a meeting of an economic advisory panel.
Abe is expected to announce a package of broad economic policies, along with a detailed "growth strategy" of structural reforms, around June 27.
Global investors have been keen to see what Abe will offer in this "third arrow" of long-term policies, meant to complement the massive monetary and fiscal stimulus that have started to pull the world's third-biggest economy out of two decades of deflation and sluggish growth.
The pressure on Abe is rising amid growing signs that the Bank of Japan has no immediate plans to expand monetary stimulus. The BOJ is set to maintain its upbeat view on the economy and may revise up its assessment on capital expenditure next week.
An updated draft of the Abe government's growth strategy, seen by Reuters on Monday, promises to overhaul corporate governance and overhaul the management of Japan's public pension fund. But it leaves many tough questions unanswered.
Japan's corporate tax rate is nearly 36 percent for large companies operating in Tokyo. Private-sector members of the government's top economic and fiscal council have proposed cutting the rate to 25 percent to put it in line with international standards.
The Finance Ministry and ruling party tax panel counter that any revenue lost in the tax rate cut should be offset by bringing in alternative revenues. Each percentage point of tax cuts would reduce government revenue by about 470 billion yen ($4.6 billion) a year, according to the finance ministry.
At the same time, only 30 percent of all Japanese firms pay corporate income tax, so fiscal hawks want many more brought onto the tax rolls to offset a cut in the tax rate.
Companies such as Fanuc Corp, NTT Docomo Inc and Central Japan Railway Co would be among the big winners from a corporate tax cut, according to an estimate by SMBC Nikko Securities.
Takuya Takahashi, senior strategist at Daiwa Securities, said expectations for a cut in the corporate tax rate to 25 percent to be approved later this year would provide immediate support for the stock market even in the absence of a specific commitment from the government.
The Nikkei stock average is down almost 7.5 percent from the start of the year.
"For the moment, markets are expecting discussion on tax cuts to continue towards the end of year and there will not be a reaction even if the government does not specify the size of tax cut this month,” Takahashi said.
Apart from the corporate tax issue, the four-page economic policy outline renews a pledge to decide by the end of the year whether to go ahead with a plan to raise the national sales tax to 10 percent in 2015.
The politically contentious sales tax hike is seen as a first step towards meeting Japan's aim of halving its budget deficit - excluding new bond sales and debt servicing - in the fiscal year ending in March 2016 and achieving a surplus in the fiscal year that ends in March 2021.
The policy outline also includes a pledge to stabilize Japan's declining population at around 100 million - representing more than a 20 percent drop - over the next 50 years, a target that outside experts have said would be difficult to reach without allowing more immigration.
The outline appears to rule out the controversial step of opening up immigration as a way to boost Japan's dwindling pool of workers. But the government has pressed ahead with plans to allow in more white-collar professionals from abroad and manual workers under a trainee program.
"Use of foreign workers is not an immigration policy," the draft said. ($1 = 102.3900 Japanese Yen)
Editing by Kevin Krolicki, Chris Gallagher, Kim Coghill, William Mallard and Simon Cameron-Moore