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Stocks

Revamp of inheritance tax could boost Tokyo stock trading

TOKYO -- A change in the inheritance tax code long sought by Japan's securities industry may help revitalize stock trading among domestic investors.

     The Nikkei Stock Average closed in on the 20,000 level Thursday, touching a midday high of 19,959. But the gain narrowed after the Bank of Japan decided against ratcheting up monetary easing further, with the index ending at 19,859.

     Foreign funds' usual "BOJ play" and profit taking by domestic individuals together kept Japan's benchmark index from reaching the difficult-to-attain 20,000 mark.

     But retail investors' contrarian trading behavior could get upended by a change in inheritance taxation that would encourage more stock investment.

     A Financial Services Agency document released in August outlining its requests for fiscal 2016 tax reform indicates the financial watchdog wants the government "to revisit inheritance tax valuation on publicly traded shares and other assets."

     Every summer the securities industry compiles its requests for the following fiscal year's tax reform. The industry has sought a revamp of the inheritance tax system for over a decade, in different shapes and forms.

     "Even the fact that the FSA incorporated it is a major first step," says Hideaki Matsunaga of the Japan Securities Dealers Association.

     Currently, shareholdings of a deceased person are valued at market prices at the time of death. As is the case with cash and deposits, there is no discount applied to the value of shares when determining taxation, with some limited exceptions.

     Real estate, on the other hand, gets discounted. Land, for instance, is valued at 80% of its officially appraised price, and buildings at around 50-70% of construction costs.

     "Holdings stocks is disadvantageous compared with owning other assets carrying market price volatility risks, forcing many into choosing to sell at the time of inheritance" says Yasushi Hoshi, head of financial research at the Daiwa Institute of Research.

     The FSA is requesting that stocks be valued at around 70% of the market price.

     On the back of this move is growing awareness that the inheritance tax code is out of sync with government policy aimed at encouraging more people to invest using NISA tax-free investment accounts, among other steps.

     A survey by the Japan Securities Dealers Association shows about half of inherited shareholdings are sold off within a year. Even if more working-age people invest via the NISA program, shares are unlikely to be passed onto the next generation under the current system, says an FSA source.

     Such changes to the inheritance tax system tend to draw criticism as benefiting the rich. Many industry insiders do not expect the requested change to come into fruition with fiscal 2016 tax reforms. But the effort "does not end this year," an FSA official said.

     By 2030, about 100 trillion yen ($802 billion) worth of assets are expected to be inherited in Japan, according to the Nomura Institute of Capital Market Research. And "about half of this will be in the form of real estate," notes Sachiko Miyamoto, a senior researcher. The assumption is that this includes high-rise condo units -- a typical form of asset that gets hefty discounts in inheritance valuation.

     If about 10% of real estate subject to inheritance is turned into stock, that would mean some 50 trillion yen flowing into the stock market.

     Retail investors in Japan have sold about 28 trillion yen more in stock than they have bought over the past decade. This has included sales related to the inheritance tax. As the government seeks to promote investment by individuals, "real estate to stocks" should be another theme along with "savings to investment."

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