Under the scheme introduced in 2003 to encourage individuals to invest rather than save, the tax rate on capital gains and dividends was cut to 10% from 20%. However, the capital gains tax cut is due to expire at the end of 2007, while the dividend tax cut is set to expire at the end of 2008.

The tax commission attached to the office of Prime Minister Shinzo Abe had recommended that the tax cuts should be allowed to lapse, arguing that they have served their purpose of lifting the value of shares traded on the Tokyo Stock Exchange.

But media reports have indicated that the ruling Liberal Democratic Party is set to overrule this view, with the party's own commission on tax reform arguing that the tax breaks should stay so as not to trigger a sell-off in the stock market.

It is also thought that, with tax breaks for corporations in the pipeline, the government was keen not to be seen favouring businesses while lumping individuals with a tax hike.

The extension of the tax breaks is expected to form part of the 2007/8 fiscal year tax reform document, which is due to be published on Thursday.