Japanese Investment Taxation Reform Becoming Urgent

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

30 August 2001

Pressure is mounting on the Japanese Government to improve the tax regime for stock market investors after the Nikkei Stock Average fell more than 3,000 points over recent weeks to close below the 11,000 line on Wednesday.

With the midyear account-settlement term coming in September, says daily Yomiuri Shimbun, there is a concern that falling stock prices may seriously damage business performance, while rekindling uncertainty over the nation's financial system.

Economic experts say that both the government and the Bank of Japan should immediately implement concrete measures to prevent stock prices from falling further and keep the economy from sinking into a double-dip recession.

On Wednesday, shares of leading banks, in addition to those of high-tech related companies whose business performances are deteriorating sharply, came under selling pressure across the board. It used to be said that if the Nikkei fell below 15,000, the banks were insolvent as a group, due to their massive stock market holdings bought at much higher prices. So improving stock market performance is not just a consumer issue.

One of the most pressing tasks facing the government is reform of the securities-related taxation system, which is one of the "thoroughgoing policies" being advocated by the Koizumi administration.

But little progress has been made in the review of that taxation system, although the administration cited it as one of the highest priority issues in connection with stock market reform.

The challenge faced by the nation's stock market, which has been characterized as a market composed of equities predominantly held by corporations, particularly financial institutions, lies in how to attract individual investors to equity investment and thus revitalize the market.

The present securities-related taxation system, however, holds little attraction for individual investors.

For instance, the tax rate on capital gains through stock transactions subject to separate self-assessment taxation is 26 percent. Meanwhile, the tax rate on interest accrued from fixed-interest postal savings and bank deposits whose principals are guaranteed is 20 percent. It is simply absurd that the tax assessed on risk-bearing equity investments is higher than that on risk-free, interest-bearing savings and deposits.

The tax rate on capital gains accrued through stock transactions subject to separate taxation should be cut as soon as possible. And for individuals to be able to invest on equal terms with business corporations, they should be allowed to make a deferred deduction of capital losses made through stock transactions and allowed to aggregate capital gains and losses made through stock transactions with other incomes.

The Liberal Democratic Party's Tax System Research Commission has been reluctant to start discussing a draft plan concerning a review of the securities-related taxation system as a preparatory step to revising the overall taxation system, scheduled to be made at the end of the year.

If the LDP panel continues to ignore the stock market issue, the prime minister and the government's Tax Commission will have to take the lead in mapping out a bill to revise the whole taxation system. There is no time to lose.

The government needs to hammer out a revised taxation plan as soon as possible and submit it to the extraordinary Diet session set for autumn.

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