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Japan govt warns on Tokyo bank tax fallout

TOKYO: Japan's central government on Tuesday warned that a controversial plan by Tokyo's feisty governor Shintaro Ishihara to slap a new tax on banks could damage the metropolis's credibility as a global financial centre.

But despite a plea from the government to rethink his proposal, Ishihara -- a right-wing rebel whose cause is popular with voters who resent banks -- looked set to forge ahead and present the plan to the Tokyo assembly on Wednesday.

The plan would impose a three-percent levy on big banks' gross profits for five years to help narrow the city's yawning budget deficit, but would not affect foreign institutions because their Japanese operations are not big enough to be included.

Central government authorities, politicians and bankers, who have vowed to fight the tax in the courts if need be, have been in a tizzy since early February when Ishihara announced his plan.

In a statement on Tuesday, the central government said Ishihara's plan could delay banks' efforts to write off their bad loans and hamper their repayment of hefty public fund injections made last March to help put their finances in order.

That 7.46 trillion yen ($67 billion) infusion of taxpayers' money is one reason voters are generally resentful of the banks and keen on Ishihara's proposal.

The Japanese government's statement also said the tax might hurt banks' restructuring and competitiveness, adding it also raised questions of fairness because it was aimed just at banks.

GOVT STEPS ASIDE, ISHIHARA POISED TO ACT

Chief Cabinet Secretary Mikio Aoki told a news conference the government wanted Tokyo to exercise "prudence" over the tax plan, but added it would not put any more pressure on the metropolis.

Authorities admit they have no legal basis to block Ishihara's tax even as they lament the damage they say it will do.

On Monday, Home Affairs Minister Kosuke Hori made a similar pitch to Ishihara in person, but domestic media said the governor was unmoved.

Key parties in the Tokyo assembly have come out in support of the plan, which has won applause from voters who perceive big banks as arrogant and pampered with political favours.

Jolted by the bank tax tempest, the ruling Liberal Democratic Party's (LDP) tax panel met on Tuesday to discuss a similar but much broader corporate tax, based on capitalisation or sales rather than profits, that would be a boon to tattered local government finances but anathema to many firms.

Both the LDP tax panel and the government's own tax commission have debated the topic for years to no avail, and few expect progress this year with a general election due by October.

Tax experts say such a tax would help rebuild local government finances by closing loopholes that allow an estimated one-third of Japanese companies to avoid paying taxes.

A key member of the tax panel, Yuji Tsushima, said most panel members favoured imposing the tax at an early stage, while paying heed to its impact on the economy and the smaller firms that are among the party's most loyal constituents.

But in a sign of the touchiness of the issue, Tsushima said no member had come out in favour of implementing the tax in April 2001, the earliest feasible start under Japan's tax system.

Panel chief Yoshiro Hayashi muddied the waters further, telling reporters it was possible the group might seek to introduce the broader tax in April 2001 if the economic situation permitted.

Banks' share prices, hard hit earlier this month after Ishihara unveiled the plan, seem to have discounted much of the impact on earnings, which analysts said would be relatively slim.

The banking sector index on the Tokyo Stock Exchange was up down a modest 0.34 percent at 1,619.91 in mid-afternoon trade on Tuesday.-Reuters