JAPANESE MEDIA LOOK AT TAX-FREE SAVINGS REFORM

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000200060001-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: December 27, 2016
• Document Release Date: May 24, 2012
• Sequence Number: 1
• Publication Date: March 19, 1987
• Content Type: MEMO

Declassified in Part - Sanitized Copy Approved for Release 2012/05/25: CIA-RDP90TO0114R000200060001-0 25X1
Central Intelligence Agency
DATE
DOC NO Cfr'I ~j_?~~ y`'~
OIR
P & PD
DIRECTORATE OF INTELLIGENCE
19 March 1987
Japanese Media Look at Tax-Free Savings Reform
Summary
The Liberal Democratic Party (LDP) decision to include repeal of a
major tax-exempt savings system in an overhaul of the tax system
surprised Japanese journalists, who thought the program was too popular
for the LDP to tackle. Political pundits in Tokyo view the LDP decision as
a major victory for Nakasone, and attribute his success to a clever political
deal involving a trade-off on the sensitive rice price issue. In addition, the
Japanese media have highlighted the positive role the contenders to
succeed Nakasone played in securing party approval for the move.
Opposition parties and liberal journalists continue to denounce the
proposed changes as "favoring the rich at the expense of the poor," but
most Japanese commentators--along with a majority of business
leaders--approve of the LDP action, and believe that it will accelerate the
deregulation of interest rates. Nonetheless, the fate of the proposal to tax
savings is currently being held hostage to the outcome of a battle over
introduction of a controversial sales tax.
This memorandum was prepared byl Office of East Asian Analysis.
Information available as of 19 March 1987 was used in its preparation. Comments and
queries are welcome and may be directed to the Chief, Japan Branch, Northeast Asia
Division, OEA
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LDP proposals unveiled in December will--if enacted--abolish the 60-year-old
Maruyu system, under which each Japanese citizen can deposit up to $19,000 in a
tax-free savings account at any one of the nation's 18,000 post offices.' Although
immensely popular with the public as well as postmasters--who earn a commission on
deposits--economists from several countries have criticized tax-free savings accounts
for lowering Japanese consumer spending. Moreover, most observers agree the system
invites abuse. For example, one person in Tokyo reportedly has used pseudonyms to
establish 21 accounts totaling $370,000, and a doctor in Hiroshima has hidden his
savings of $1.4 million in 82 accounts in two prefectures.
When the LDP began a debate on the future of the Maruyu system in the summer
of 1986, the Japanese media were skeptical that the ruling party would endorse
sweeping reform of the popular system. Their skepticism stemmed in part from the
party's reluctance to follow through on previous proposals--most recently in 1984--to
make tax-free saving provisions less generous. In addition, in the fall of 1986, Japanese
political analysts contended that the number of Maruyu supporters within the party was
growing. For example, they pointed out that 400 LDP members attended a convention in
November 1986 sponsored by opponents of reform. A prominent participant was Deputy
Prime Minister Shin Kanemaru, the most influential of the postal savings lobbyists. 0
In hindsight, however, the media are painting the party members' campaign to
protect the Maruyu system as a smokescreen. After reading transcripts of meetings of
the LDP Tax Council, as well as meetings involving the entire party, Japanese journalists
now believe that a deal involving reform of the Maruyu system was struck as early as
last summer. More specifically, several press items suggest that the government's
decision to maintain the current rice price paved the way for abolition of the Maruyu
system. farmers
have been the primary beneficiaries of the current system, because in the small villages
in which they live few savings alternatives exist. The repeal of Maruyu, therefore, will
hurt this important LDP constituency. To lower the price of rice about the same
time--as Nakasone had planned--would have been doubly damaging to farmers and to
LDP members with strong farm support. The media consider the LDP's decision in
August 1986 to maintain the current price of rice for another year to be a peace offering
that allowed the LDP Tax Council to proceed with plans to abolish the Maruyu system.
The tax-free status on the interest earnings of postal savings and some bank
deposits will be continued for people aged 65 and older, fatherless families, socially
disadvantaged, and the handicapped. F__1
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Bureaucratic equities in the Maruyu system also required the LDP to make deals
among affected ministries before unveiling the proposal:
? The media note that the Finance Ministry, a long-time opponent of Maruyu, will
be the biggest winner, standing to gain additional annual tax revenues of
approximately $85 billion.
? The biggest loser--the Ministry of Post and Telecommunications (MPT), which
has nominal jurisdiction over the postal saving system's $645 billion in
assets--won an important concession. It will be allowed to invest some postal
savings funds--nearly $7 billion worth in the initial year--at its own discretion
rather than to channel them through the fiscal investment and loan program,
which provides funding for the Japan Development Bank, Housing Loan
Corporation, and other official financial institutions.
faded. z
? Postmasters also won the right to sell government bonds if the Maruyu changes
are implemented. Postmasters would earn commissions on bond sales, and this
would compensate for lost commissions as the appeal of postal savings accounts
The New Leaders: Unsung Heroes?
Although the press is playing the Maruyu decision as a personal victory for
Nakasone, it also is noting that the move demonstrated the political clout of Nakasone
faction member Sadanori Yamanaka as well as of the "new leaders" who hope to
succeed Nakasone--LDP Secretary General Takeshita, LDP Executive Council Chairman
Abe, and Finance Minister Miyazawa. Yamanaka is widely known for the major role he
played in the reform of the Anti-Monopoly Law in 1976. The Japanese press has
regarded him as Nakasone's "hatchetman" in the area of taxes since he was appointed
chairman of the LDP Tax Council last summer. Journalists attribute the new leaders'
support for Maruyu reform to their desire to get the controversial measure out of the
way before they come to power:
exemptions are abolished.
Interest income from up to $19,000 on principal in bank deposits, investment trusts,
and government bonds has enjoyed the same tax-exempt status, but the institutions
offering these investments possess an array of higher yielding investment vehicles
and therefore are in a position to win investors away from postal savings if all tax
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? Abe has been the most outspoken of the three on the need for reform. Along
with Chief Cabinet Secretary Gotoda, he publicly criticized MPT officials for
lobbying against repeal of the system in meetings with LDP members, labeling
such tactics as meddling in party business. Abe also was instrumental in
convincing one of the Tax Council members from his faction, Akira Fukida, to
support the new policy.
? Takeshita initially followed a strategy of quietly containing antireform elements,
but he dominated the final meeting on the issue and came out categorically
against maintaining the Maruyu system.
? Miyazawa was given credit for actively collaborating with Nakasone and
Yamanaka by garnering the support of his faction, which pleased not only the
Prime Minister but also bureaucrats in the Finance Ministry. Political observers
suggest that as a result of this cooperative effort, if Miyazawa becomes the next
prime minister, he is likely to name Yamanaka his finance minister.
Editors foresee temporary confusion among financial institutions if the proposed
reform bill is implemented. Japan's financial community also expects the end of Maruyu
to spark major shifts in funds among institutions. Not surprisingly, financiers who
believe their institutions will benefit from these shifts have come out in favor of the LDP
decision:
? Securities firms generally welcome the reform as a possible new stimulus to the
stock market.
? In general, private-sector banking institutions are united in support of abolishing
postal savings' tax-free status, calculating that the change would make bank
rates for deposits look more competitive.
Most commentators believe Maruyu reform will accelerate the deregulation of
Japanese domestic interest rates. But they doubt that abolishing Maruyu will boost
consumption--and thus imports--enough to quickly reduce Japan's massive trade
surplus.
Despite the generally upbeat assessments of the Maruyu reform, the media
believe the proposal's fate is being held hostage to controversy over other provisions of
the tax reform bill. More specifically, a major element of the package, introduction of a
5-percent sales tax, has generated widespread dissension. The opposition parties have
so far maintained a unified front to block passage of any tax legislation in the Diet.
Although Nakasone's reform package has been denounced even by his long-time friend,
the president of the Japan Chamber of Commerce, as well as some of his own party
members, prominent observers in Tokyo believe Nakasone will get his tax reform by the
summer at the earliest. Some analysts, however, caution that it is at least conceivable
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that Nakasone may be forced out of office before the summer in exchange for passage
of the reform bill. 25X1
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SUBJECT: Japanese Media Look at Tax-Free Savings Reform
- Donald Gregg, Office of the Vice President
- William Brooks, Department of State
- Chuck Kartman, Department of State
- Dan Morris, INR/EAP/Japan
- Cdr. (Ret.) James Auer, DOD/ISA/EAP
Byron Jackson, Department of Commerce
Jerry Schrager, USTR
Maureen Smith, Department of Commerce
Doug Mulholland, Department of Treasury
David Germany, Council of Economic
Central Intelligence Agency
1
- Director, DCI/DDCI Executive Staff
1
- NIO/EA
1
- NIO/Economics
1
- C/EA/RR
1
- OEA/NEA/Korea Branch
1
- OEA/NEA/STI Branch
1
- OEA/NEA Division
1
- OEA/China Division
1
- OEA/SEA Division
1
- D/OEA
1
- C/Production/OEA
1
- FBIS/NEAD
1
- DDI
1
- Senior Review Panel
1
- PDB Staff
1
- C/PES
1
- CPAS/ILS
5
- CPAS/IMC/CB
1
- DDO/EA Division
1
- DDO/EAi
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DDI/OEA/NEA/Japan
19 February 1987
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