Explainer: Why is Japan Reviving the Debate on Higher Taxes for Investment Income?

By Makiko Yamazaki

TOKYO (Reuters) – The leadership race within Japan’s ruling party has reignited discussions about increasing the country’s tax on investment income, a proposal that was previously set aside by the outgoing prime minister. As Japan, the world’s fourth-largest economy, looks to enhance revenue for its substantial budget, this topic has garnered renewed attention.

CURRENT TAXATION ON CAPITAL GAINS AND INVESTMENT INCOME

Currently, the tax levied on investment income—which includes capital gains from stocks and real estate, as well as dividends and interest from savings and Japanese government bonds—is uniformly established at 20%. This rate is significantly lower than the progressive tax rates on salaries, which can reach up to 45%. The intention behind this flat-rate system is to promote investment by easing the overall tax burden for higher-income individuals, who typically earn more from investments. This issue is often referred to as the "100-million-yen wall," as it describes the diminishing tax burdens for those earning more than 100 million yen (approximately $698,080).

OUTGOING PRIME MINISTER’S POSITION

When he assumed office in 2021, Prime Minister Fumio Kishida made raising the investment tax rate one of his central policy objectives in an attempt to address wealth inequality as part of his "new capitalism" initiative. However, the proposal was abandoned relatively quickly amidst backlash from investors who were apprehensive about a possible departure from the market-friendly policies implemented by former Prime Minister Shinzo Abe. Investors also held Kishida accountable for a decline in the stock market at that time. Subsequently, Kishida recalibrated his "new capitalism" agenda to focus on converting dormant household savings into investments, partially as a measure against rising inflation, making permanent a program that offers tax incentives for household stock investments.

Kishida is set to step down this month, concluding a three-year term marked by political controversies. The ruling Liberal Democratic Party (LDP) is expected to elect a new leader on September 27, who will also assume the role of the country’s next prime minister.

CURRENT CANDIDATES’ VIEWS

Shigeru Ishiba, a former defense minister and candidate in the leadership race, has stated that he would increase taxation on investment income if he were to become the next prime minister. This declaration has elicited various responses from other candidates.

Digital Minister Taro Kono, former Environment Minister Shinjiro Koizumi, and former Economic Security Minister Takayuki Kobayashi have voiced their opposition to Ishiba’s proposal, arguing that it contradicts the government’s initiatives aimed at promoting a transition from savings to investments. Ishiba later clarified that any increase in tax rates would target only high earners.

Currently, about half of Japan’s 2,000 trillion yen (around $14 trillion) in household financial assets is held in cash or bank deposits. The government is actively implementing policies, such as the NISA tax-exempt stock investment program, to shift this trend.

If a higher investment tax rate is formally proposed, it will need to undergo discussions at the ruling party’s tax panel later in the year, where it is likely to face resistance. Komeito, the LDP’s junior coalition partner, has also expressed doubts regarding the proposal.