Japan’s Investment Tax Debate Heats Up Amid Leadership Race

Debate over raising taxes on investment income in Japan has gained momentum amid the ruling party’s leadership race, once again emerging as a potential way to raise revenue as the country looks for ways to finance its massive budget.Japan currently imposes a 20% tax on various types of investment income, including equity and real estate interests, dividends and savings, and interest payments on government bonds. This flat rate is considerably lower than progressive tax rates on wages, which can be as high as 45%.

The system is designed to encourage investment and has been particularly beneficial to high-income individuals, whose incomes come more from investments. This has led to what is known as the “100 million yen wall”, where the tax burden is reduced relative to income for those earning over 100 million yen ($698,080).

Former Prime Minister Fumio Kishida proposed raising the investment tax rate as part of his “new capitalism” agenda aimed at addressing wealth inequalities when he took office in 2021. But he suspended the plan after facing opposition from investors wary of a shift away from market-friendly policies and a stock market decline attributed to his leadership.

Instead, the Kishida administration focused on converting idle household savings into investments as a strategy against rising inflation and consolidated a tax deduction program for household stock investments.

With Kishida’s term ending this month, the Liberal Democratic Party (LDP) is set to elect a new leader on September 27, who will also become the new prime minister. One of the candidates in the leadership race, former defense minister Shigeru Ishiba, has reignited the debate by proposing to increase taxation on investment income, particularly targeting the wealthy, if he becomes prime minister.

Ishiba’s stance prompted other candidates, Digital Minister Taro Kono, former environment minister Shinjiro Koizumi and former economic security minister Takayuki Kobayashi, to voice their opposition, saying such a policy would conflict with the government’s efforts to encourage investment over savings.

The government is trying to mobilize some of the 2,000 trillion yen ($14 trillion) in assets, half of which are held in cash or bank deposits by households. The effort includes the NISA tax-free stock investment program for individuals.

Any proposal to increase the investment tax would first be considered by the ruling party’s tax panel towards the end of the year. It is expected to face opposition, including from the LDP’s junior coalition partner Komeito.