The Financial Services Agency said it aims to lower the capital gains tax and allow tax exemptions on small capital gains.

The FSA plans to prepare legislation regarding these reforms — a bid to revitalize the flagging stock market — and will submit it to the Diet in September. By this time, the agency will have consulted the Finance Ministry and the ruling parties, an agency official said Wednesday.

Reform of the stock market is one of the main pillars of a blueprint for structural reform advocated by Prime Minister Junichiro Koizumi.

Falling share prices have affected the stock market as companies have unwound their cross-held shares. The FSA also aims to promote direct financing by firms via a rise in equity investments by individual investors.

To this end, the FSA’s plan is designed to make share investments more attractive to individual investors.

Japan’s financial system currently relies heavily on indirect financing provided by banks. Of the 1.4 quadrillion yen in individual financial assets held by Japanese people, securities account for only 4.6 percent.

The FSA believes that a temporary 1 million yen exemption clause on long-term capital gains held for more than a year, which is to begin in October and end in March 2003, should be permanent.

The agency also wants the use of a withholding tax option, where investors have to pay their capital gains taxes via withholding tax, to be extended further than was originally planned.

The latter method is popular with individual investors.

The withholding tax option is scheduled to be abolished in March 2003, following a two-year extension.

The FSA is also proposing that the capital gains tax be lowered from 26 percent to 20 percent or less and that a carry-over of capital losses to future years be allowed.

The agency also aims to promote the use of investment trusts by offering tax incentives for long-term investment trust investors.

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