Investors Can Shield Source of Money : Japanese Tax Revision Uncorks Funds

Rich investors flush with cash freed by new capital gains rules have poured money into Japan’s stock market at an unprecedented rate and helped push it to new highs, market analysts said today.

Some of the torrent of yen pouring into the market has flowed from the country’s thriving underground economy.

“Underground money is coming out from under the rocks,” said one broker.

“The black market in Europe and Asia is associated with the Mafia and drugs,” said the president of an investment advisory company. “But in Japan most of it comes from illegal property transactions.”

“It has been very cash-rich individuals more or less leading the market,” said Ross Rowbury, a senior broker at Sanyo Securities. “Institutions were left standing with their mouths open.”

“It’s a great taxation policy. Everyone is happy,” said Rowbury. “Wealthy individuals are happy, securities houses are happy because the market is buoyant and the government is happy because it is getting money.”

The new capital gains tax system took effect April 1 and applies only to individual investors.

Under the old system, there was no capital gains tax unless individuals traded over 120,000 shares or did over 30 transactions a year. If they did, the gains were taxed along with other income at a high rate and income sources had to be revealed to tax authorities who often asked the source of vast sums used for investment.

Now the rich are free to trade to their hearts’ content without having to report the source of their capital. Individuals can either pay a 1% tax on stock transactions at the time of the sale or a 26% tax on capital gains.

The 26% option means going to the tax office and revealing all income sources. About 90% of individual investors have so far chosen the 1% solution instead, brokers said.