Japan Proposes Tax-Cutting Package As Mori Prepares To Resign

Mary Swire, Tax-News.com, Hong Kong

12 March 2001

Senior members of Japan's ruling coalition presented an emergency package of economic reforms on Friday to Prime Minister Yoshiro Mori, who indicated unofficially over the weekend that he was preparing to resign within a month.

The package is a recognition of the economy's failure to respond to conventional injections of support, but has also to be understood in the context of July elections, and continued falls in equity prices. Its proposals included reductions in the taxation of dividends and property purchases and the creation of a special fund to absorb stock sales. Other measures include reducing inheritance tax on stocks and capital gains tax on long-term holdings of shares.

Critics immediately said that while it was a step in the right direction, it was too little and possibly too late.

After submitting the package to Mr. Mori, Shizuka Kamei, policy chief of the dominant Liberal Democratic Party, said the prime minister wanted to consider the proposed steps as soon as possible. The tax revisions included in the package would be submitted to the current session of Parliament.

The Nikkei closed on Friday at 12,627.90 - it used to be said that when it falls below 15,000 the banks are underwater on their share portfolios. Banks are under pressure to unwind their cross-shareholdings in Japan's biggest companies to finance the write-off of non-performing loans but with equities at such low levels the process is damaging or disastrous for their balance sheets. The support fund proposed in the package would attempt to cushion sales of shares held by companies in one another - such selling tends to accelerate toward the end of the business year on March 31 and has been a major factor in the Tokyo stock market's recent slump.

The ruling coalition also asked the Bank of Japan to loosen monetary policy, to set an inflation target and to accelerate purchases of Japanese government bonds.

Last Thursday, Finance Minister Kiichi Miyazawa shocked Japan by saying that the country's finances were "approaching collapse" and that "fundamental fiscal reform" was necessary.

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