World Economy

Japan's Abe calls for cut in corporate tax rate

Yoshikazu Tsuno | AFP | Getty Images

Japan's Prime Minister Shinzo Abe has called for a cut in the country's corporate tax rate as he seeks to boost the economy from a two-decade long slump.

Speaking at a press conference on Tuesday, he urged the country's political parties to begin talks on how to bring the rate down to meet global competition.

Earlier on Tuesday, Abe said his government would raise the sales tax to 8 percent from 5 percent next April.

The move, viewed as a a critical step in curbing the country's soaring debt levels, will be accompanied by the cut in corporate taxes and a 5 trillion yen ($51 billion) stimulus package.

The strengthened against the dollar after Abe's comment on Tuesday evening.

"The government is trying to send a signal that it's serious about fiscal consolidation and getting its debt on a more sustainable path," said Benjamin Mandel, economist at Citi. Japan's gross public debt is estimated to reach 245 percent of gross domestic product this year - the highest in the world.

Investors cheered the decision, with Japanese stocks extending gains and dollar-yen climbing higher. Markets were already bolstered by a stronger-than-expected Tankan survey released earlier in the day, which showed business sentiment rising to the highest level in six years.

(Read more: Feeling good: Japan business sentiment soars)

"It's the right the thing to do," Jesper Koll, managing director & head of Japanese equity research at JPMorgan Securities in Tokyo, told CNBC after the announcement. "What we need in Japan's leadership is consistency, clarity and determination to do what is necessary. Prime Minister Abe deserves to be applauded here."

"We are moving towards a better tax system. They are buying insurance, there is going to be supplementary spending to ensure the economy is not going to fall into recession, it's a very good development in Japan," Koll added.

There has been some speculation that the Bank of Japan (BOJ) could step up its aggressive monetary easing program to help buffer the economy.

"We feel that the BOJ will continue to ramp up the level of easing in the coming months to help offset any concerns around the sales tax and this should continue to provide downside risks to the yen," said Stan Shamu, market strategist at IG.

The central bank will hold a two-day meeting starting Thursday this week, however economists do not expect an immediate reaction to the fiscal tightening.