Japan to Tax Interest on Savings Accounts; U.S. Complaints Cited

Parliament enacted a law Saturday that will eliminate the tax exemption for interest paid on savings accounts, a move long advocated by American economists and government officials as a way to encourage consumption and spur demand for imports in Japan.

All the opposition parties voted against the measure, but the upper house completed action on the measure just before the end of a special session. The lower house had earlier adopted the same measure.

Tax exemptions will end April 1 and a uniform 20% tax will be imposed on interest paid on time deposits, postal savings and government bonds.

Until now, individual Japanese have been allowed to invest up to $21,429 in each of these three categories--a total of $64,287--and have not been taxed on the interest received. At current interest rates, an individual can realize up to $3,032 in annual interest, tax-free.

Interest on all other forms of savings, including those that are now subject to taxes, will be taxed at the rate of 20%.

People who are 65 or older, handicapped people and women receiving widows’ pensions or supporting children on their own will continue to be eligible for the present exemption on interest.

According to the Bank of Japan, total savings in Japan as of March 31, 1986, were $3.6 trillion, of which 57% or $2.05 trillion, was invested in tax-free accounts. Excluding accounts held by those who will continue to receive the tax exemption, at least $75 billion in interest will be subjected to tax beginning next April.

The value of accounts that will be subject to taxation for the first time was estimated at $1.6 trillion.

The present system of tax exemption on savings dates back only to 1963, but Japan has exempted specified forms of savings ever since 1920.

Japanese save 20% of their disposable incomes--about four times the American level--and according to American economists, this limits demand at home and encourages manufacturers to produce for export. Reagan Administration officials have argued that eliminating the tax exemption for savings will help reduce America’s burgeoning trade deficit with Japan, which last year reached $58.6 billion. This year, it appears to be headed toward $60 billion.

Acting U.S. Secretary of Commerce Bruce Smart complained only last Tuesday that Japan’s high rate of savings is dampening domestic consumption.

Prime Minister Yasuhiro Nakasone and officials of the Finance Ministry cited American complaints in justifying the removal of the tax exemptions. But the real pressure for change came from a need for more tax revenue to eliminate the government’s reliance on borrowing to finance budget deficits.

Financial institutions here were said to be convinced that the end of tax-free interest will do little to dampen the Japanese tendency to save. Rather, they expect the move to spur a shift in savings patterns toward forms of investment--mutual funds, for example--that offer high rates of return.

At present, tax-exempt savers receive 5.6% interest on 20-year government bonds, 3.8% on postal savings and 4.7% on five-year time deposits. By comparison, banks are offering fixed-rate housing loans at 6.3%. The prime interest rate is pegged at 5.2%.

The change promises to strike a blow at tax evasion, which is widespread in Japan. Until Jan. 1, 1986, any person could open a tax-free account without presenting identification, and banks and post offices openly encouraged persons who had used their full personal limits on tax-free accounts to open new ones under fictitious names.