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Japan govt approves tax plan amid debt worries

Hatoyama abandoned an important campaign pledge on Monday in order to rein in public debt, now approaching 200 percent of GDP, and decided to replace a surcharge on gasoline with a new tax at the same rate due to falling tax revenues.

Some investors say this may help the government to achieve its self-imposed cap on new government bond issuance at around 44 trillion yen ($483 billion), as central and local governments would have lost 2.5 trillion yen in revenue had it scrapped the gas surcharge.

But they want the government to present a plan to put public debt under control in the long run. The government has pledged to come up with such a plan in the first half of next year.

“Market players are assessing the government’s stance on fiscal discipline while watching whether it can stick to the 44 trillion yen target,” said Koji Ochiai, a senior market analyst at Mizuho Investors Securities.

“They also want to see its long-term fiscal reform plan. If the government fails to meet expectations, the market will react negatively and send bond yields higher.”

The government estimates that the tax reform guidelines will eventually lead to an increase in tax revenue of 1 trillion yen for both the central and local governments, though tax revenue will be down by more than 40 billion yen in the next fiscal year.

Following are key points of the tax guidelines for 2010/11:

· Abolish a surcharge on gasoline but retain the tax rate for the time being; however, it would take legal measures to suspend taxation at that rate if oil prices surge as seen in 2008.

· Reduce the automobile weight tax.

· Raise the tobacco tax by 3.5 yen per cigarette from Oct. 1, 2010, which will raise the retail price of cigarettes by 5 yen a piece when including rises in sales prices and the consumption tax.

· Continue to mull the introduction of an environment tax so that it can be implemented in the year from April 1, 2011.

· Abolish the tax deduction for dependents who are 15 years or younger, and reduce special deductions for households with high school age dependents.

· Make cash gifts worth 15 million yen tax-exempt in 2010 and those up to 10 million yen tax-free in 2011 in case they are used for housing purchases. The upper limit compares with the current 5 million yen.

· Exempt foreign investors from tax on interest income from Japanese corporate bonds to be issued by March 31, 2013 to encourage foreign investment in Japanese markets.

· Introduce tax exemptions on dividends and capital gains from stock investment of up to 1 million yen a year for individuals for three years, starting in 2012.