Immediate Tax Reforms Needed To Save Japanese Market

by Mary Swire, Tax-News.com, Hong Kong

12 September 2001

Calls for fiscal action to resuscitate Japan's moribund stock markets are growing increasingly strident as the country's geriatric LDP Research Commission on the Tax System resumes discussions after about three months of suspension, finally and belatedly launching a reform of the securities-related taxation system.

Says the influential daily newspaper Yomiuri Shimbun: 'The panel must censor itself most severely for lollygagging over the past three months while the fall in stock prices has taken on critical proportions. We urge the panel to hasten its deliberations and come up with a tax-revision proposal that will reinvigorate the stock market in time for submission to an extraordinary Diet session set to convene late this month. We wonder if the executives of the LDP tax panel have any idea of the damage further significant falls in stock prices would have on the economy.'

This was written one day before the New York tragedy sent the Nikkei reeling to close at 9,700, more than 4,000 points down in less than a month.

Stock-appraisal losses by 15 major commercial banks have already ballooned to 2 trillion yen. Under the mark-to-the-market accounting system to be introduced for September's mid-term settlement, up to 60 percent of stock-appraisal losses have to be deducted from surplus funds set aside for dividend payments. The financial difficulties in dealing with account settlements threaten to further delay bad-loan disposals by banks and cause another lending crunch.

A bill seeking to limit the value of banks' stock holdings to their net worth, is scheduled to be submitted to September's extraordinary Diet session. If the bill is enacted, the major commercial banks will have to release 11 trillion yen worth of stocks. The government is planning to establish an organization to purchase stocks held by banks and other financial institutions.

But this is the wrong answer - it seems that the only action government is ever capable of taking is to reach for the bond markets. Where will it get the money to purchase these stocks other than from the pockets of private savers? The result will be further damage to stock market values. What the government should be doing is to launch an immediate, root-and-branch reform of the taxation system in order to encourage share investment by individuals. Reconstruction of the economy hinges on whether money currently held by individuals in bank deposits and postal savings can be diverted to direct stock investment.

The tax rate of capital gains on stock transactions to be imposed under the separate self-assessment taxation system should be lowered drastically from the current 26 percent, says the Yomiuri Shimbun. It should also be made possible to defer transaction losses for a year into following years. The separate witholding taxation system, which is to be abolished at the end of March 2003, should be maintained until the stock market becomes stable in view of the fact that many individual investors use that tax payment system.

An executive of the LDP tax panel has defended the current taxation system on capital gains, saying, "We have taken measures to prevent stock prices from declining, including one to make tax-exempt capital gains of up to 1 million yen to be reported under the separate self-assessment taxation system." But this tax-exemption ceiling is applied only to stocks held for at least one year and it will expire at the end of March 2003, giving no breaks on stocks purchased from next April onward. This is the sort of cosmetic measure that should be avoided at all cost, given the seriousness of the current situation, says the newspaper.

Japanese Prime Minister Junichiro Koizumi, himself once chairman of the tax panel, faces serious damage to his credibility if he doesn't take immediate and far-reaching action to jerk the panel out of its self-satisfied stupor.

 

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