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Japanese Government In Disarray Over Stock Tax Breaks

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

29 November 2006


The Japanese government is currently in disarray internally over whether to renew tax breaks for investors in the securities market.

According to reports, the special tax advisory panel attached to the Prime Minister's office is set to recommend that the tax breaks have served their purposes of attracting more funds into the Tokyo stock market and should be abolished.

The proposal is thought to be supported by the Finance Department, which is eager to boost its revenue take to help tackle the government's huge debt and budget deficit. The government is also likely to argue that restoring the tax rates to their former levels would level the playing field for other taxpayers currently paying 20% tax on bank deposit interest and bonds.

However, the Financial Services Agency, the country's financial market regulator, is said to oppose the move, arguing that it would send the wrong signal to international investors about Prime Minister Shinzo Abe's new government and lead to a share sell-off.

“If the tax is raised, we are worried that individual investors could leave the market and foreigners, who are the ones that are buying, might become worried,” an FSA official was quoted as suggesting by the Financial Times.

The government introduced the temporary cuts in capital gains on share and mutual fund gains, and stock dividends, to 10% from 20% in a bid to boost the sagging stock market. The capital gains tax measure is due to expire at the end of 2007, while the dividend tax cut will expire by the end of 2008.

Speculation that the government was going to restore tax rates to their former levels recently sparked a sell-off on the Tokyo Stock Exchange, with TSE President Taizo Nishimuro noting at a National Press Club meeting that concerns over the future of the tax breaks had turned both individual and foreign investors "from net buyers to net sellers".

Since the tax breaks were introduced however, the Nikkei 225 index has doubled to more than 16,000 points, and analysts have suggested that the measures have served their useful purpose and that any downturn in share prices would be short-lived.


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