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%. The capital gains tax cut is due to expire at the end of 2008, while the dividend tax cut is set to expire at the end of 2009.

A separate government tax panel had suggested that these tax breaks should not be renewed, to help reduce Japan's huge public debt, despite warnings from investors and analysts that such a move could have a detrimental impact on Japan's equity markets.

However, according to reports in the national media, the LDP's tax policy panel has agreed that the tax breaks should remain, but with a new income ceiling imposed. Under this proposal, it is thought that the 10% capital gains tax rate will be extended for up to two years on income up to 5 million yen (US$44,700), while the discounted dividend tax rate will also continue with an income ceiling of between 500,000 yen and 1.5 million yen.

However, these proposals may be rejected by the upper house of parliament, where the ruling coalition suffered a major electoral defeat earlier in the year.

The less influential government tax panel had proposed as an alternative that investors should be able to offset losses from stock investments against taxable income from the 2009 fiscal year, so that incentives to invest in the market would be retained.

The coalition is set to announce its plans for the tax system for the coming fiscal year on Thursday.