Japanese Govenerment to Exempt Foreign Investors from the Corporate Bond Tax

Good news from Japan. According to Reuters, the Japanese Financial Services Agency is seeking to temporarily exempt foreign investors from paying the corporate bond tax on Japanese bonds. Why? According to the FSA, the corporate bond tax is a 15% fee withheld from the interest income earned from holding Japanese bonds. According to Reuters, "Out of some 68.1 trillion yen ($748 billion) in Japanese corporate bonds outstanding as of March 2009, foreigners held a mere 0.6 percent." FSA officials believe that the corporate bond tax is but one cause of this diminutive attention from foreign investors.

If the goal of the FSA is to increase the demand for Japanese bonds, then removing the corporate bond tax is an appropriate decision. Ceteris paribus, if taxes imposed upon the bond-interest earned by bondholders (lenders why purchase bonds) decrease, then the wealth of bondholders and the expected returns on bonds will increase. Furthermore, if the wealth of bondholders and the expected returns on bonds increase, then the demand for bonds will increase as well since these are determinants of bond demand.

Moreover, if the demand for bonds increases, then the supply of loanable funds will increase, since every bond transaction involves an exchange of loanable funds from bondholders to bond issuers. The exemption proves to be a step in the right direction for Japan, especially since it will enhance Japan's competitiveness with nations like Germany, Britain, France and the U.S. where such taxes on foreigners are non-existent.


-Kitano, Masayuki, and Naoyuki Katayama. "Japan to Exempt Foreigners from Corporate Bond Tax | Reuters." Business & Financial News, Breaking US & International News | Reuters.com. 01 June 2010. Web. 02 June 2010. http://www.reuters.com/article/idUSTOE65000X20100601