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An index tracking the prices of domestic corporate goods was up 0.1 percent in November compared to the previous month, the Bank of Japan said on Wednesday, standing at 102.6.

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Japan's Flagship Economic Zones Lose Luster

TOKYO—With his popularity ebbing over controversial secrecy legislation, Japan's Prime Minister Shinzo Abe had been eager to showcase one of his most closely watched strategies for growth—special economic zones featuring steep corporate tax breaks.

But just at the moment the premier wanted to see his gleaming flagship idea take shape, a key tax panel within his ruling Liberal Democratic Party is set to shelve, for now, the inclusion of lower rates for businesses operating in the zones, lawmakers with knowledge of the discussions said.

That means the special zones will likely be launched next year without one of their main attractions: big tax breaks.

"The program is not bold enough to even be called a flagship," said Kyohei Morita, chief economist at Barclays in Tokyo. "The high hopes for the special economic zones, and Mr. Abe's commitment to deregulation, are fading."

The first two elements of the prime minister's "Abenomics" policy platform have had a highly visible impact on the economy. A large spending package and aggressive monetary easing have weakened the yen, boosted corporate earnings and catapulted stocks to new highs over the last year.

But as the stellar economic expansion seen in the first six months of 2013 tapers off, the time has come for Mr. Abe to deliver on the so-called "third arrow" of his growth strategy that he trumpeted in the summer.

The special economic zones aim to offer pockets of experimental deregulation that can be used as engines of growth and models for wider structural reform. The potential tax incentives were among the main attractions.

The Cabinet Secretariat, the office spearheading the establishment of the zones, has proposed various corporate tax breaks—including a 40% tax-free allowance on earnings and complete write-offs of retained losses, compared with the current ceiling of 80%.

But the proposals have met resistance from a cautious finance ministry and skeptical ruling party lawmakers, who say the panel has found it difficult to offer such generous incentives to zones whose overall design has yet to be fleshed out. The panel has approved other concessions in the zones, including tax breaks on capital investment.

"More tax breaks will be considered after details of the zone become clearer," the panelists said in a set of draft proposals given to the media on Tuesday.

Mr. Abe is setting up a committee on the special economic zones later this month to hammer out these types of specific details, such as where the zones will be located. The Tokyo metropolitan area is expected to be one of the zones.

Analysts and business lobbies say Tokyo's 38% corporate tax rate must be lowered to a more competitive 25%, or less, to keep strong domestic companies based in Japan while at the same time attracting foreign capital.

The draft proposals from the panel said that in addition to a previously announced sales-tax increase, the government plans to boost the income tax of high earners from 2016, while increasing taxes on vehicles with smaller engine displacements.

The finance ministry says it shares Mr. Abe's view that competitive corporate tax rates are necessary to make Japan an attractive place to run businesses, but it insists changes must be made carefully to minimize any negative impact on Japan's efforts to put its fiscal house in order. Japan's debt-to-gross domestic product ratio is more than 200%, the highest among major industrial nations.

The tax panel has already decided to postpone addressing the wider issue of major cuts to Japan's nationwide corporate tax rate from April 2015, citing the time needed for discussion. The tax breaks for the special zones now seem set to meet the same fate.

It's not the first setback to the government's economic zones policy. Initial proposals calling for labor and agricultural deregulation in the zones ended up getting watered down as bureaucrats at related ministries pushed back.

At a news conference on Monday, Mr. Abe reiterated his commitment to carrying out changes. "There will be no end for my reform efforts," he said.

Japan's inflation is set to stay above 1 percent during the first half of next year, Bank of Japan Governor Haruhiko Kuroda said on Wednesday.

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The Bank of Japan will on Thursday release the minutes from its monetary policy meeting on November 20 and 21, highlighting a modest day for Asia-Pacific economic activity.

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Industrial production in Japan was up a seasonally adjusted 0.1 percent in November compared to the previous month, the Ministry of Economy, Trade and Industry said in Friday's preliminary reading - rising for the third straight month.

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Japan saw a current account deficit of 592.8 billion yen in November, the Ministry of Finance said on Tuesday.

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The M2 money stock in Japan jumped 4.2 percent on year in December, the Bank of Japan said on Wednesday, standing at 862.8 trillion yen.

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Core machine orders in Japan jumped a seasonally adjusted 9.3 percent on month in November, the Cabinet Office said on Thursday - coming in at 882.6 billion yen.

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The Japanese government on Friday upwardly revised its assessment of the economy for the first time in four months as the recovery picked up, reflecting improvement in household income and business investment. "The Japanese economy is recovering at a moderate pace," Cabinet Office said. This is an upgrade from its view last month that the economy is "in the process of recovery at a moderate pace."

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The Bank of Japan on Wednesday decided to keep its monetary easing plan unchanged and retained its inflation forecasts for the next two years, strengthening expectations that the central bank may keep the policy steady at least for now, with consumer prices evolving in line with its forecasts. The BoJ will keep the target of the monetary base expansion at an annual pace of JPY 60-70 trillion.

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