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TOKYO (Reuters) - Shares of Japan Tobacco Inc (JT) (2914.T) rose as much as 8 percent before giving up gains on Wednesday after the government said it was looking to sell its entire 50 percent stake, a move seen giving management greater freedom in business decisions.
The decision, part of efforts to find funds to rebuild northeast Japan after the March earthquake and tsunami, marks a major change from previous debate that had focused on reducing the government's holding to a third. [ID:nL3E7KR1YN]
The sale of the government's JT shares, which it values at 1.7 trillion yen ($22.2 billion), would take place in two stages, following necessary legislative changes that would require the agreement of opposition parties. It would first be cut to one-third over the next five years, and then the rest would be sold over another five years.
"Completely privatizing JT, and other companies, would give them a free hand to make business decisions for themselves," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management Co.
The news sent shares of the maker of Mild Seven cigarettes as high as 396,500 yen in early trade, their highest since October 2008, before falling to 365,500 yen, an 0.4 percent drop from Tuesday's close.
Japan Tobacco was the heaviest-traded issue by turnover, with morning trading reaching one and a half times its 30-day full-day average.
JT shares have rallied 14 percent since July 25, when senior politician Katsuya Okada mentioned the government might cut its stake, on views the move would lead to share buybacks and a subsequent lifting of shareholder returns.
On Tuesday, a top JT executive said the firm, which has been calling for the government to offload its stake for years, would buy back some shares offered by the government.
In the year to June 30, JT's return on equity was 8.9 percent, while Philip Morris International (PM.N) returned 203.3 percent and British American Tobacco (BAT) (BATS.L) gave back 37.8 percent, Thomson Reuters data showed.
Over the same period, JT's dividend yield, at 1.7 percent, was lower than Phillip Morris' 3.8 percent and BAT's 4.4 percent.
But it is unknown what effect a government sell down of its JT stake would have on regulations that set cigarette prices and require the world's No.3 cigarette maker to buy all tobacco leaf grown in Japan.
Democratic Party policy chief Seiji Maehara also proposed raising about 700-800 billion yen by selling energy-related shares held by the government, which include Inpex Corp (1605.T) and Japan Petroleum Exploration Co (Japex) (1662.T).
Based on the agreement reached by the government and ruling party agreement, the Democrats will discuss the measures and the extra budget with a small coalition partner and then begin talks with opposition parties, which control the upper house of parliament and can block bills.
The government aims to submit the third extra budget, of which 9.1 trillion yen will be allocated for reconstruction, to parliament next month.
Shares of Inpex rose 0.8 percent while Japex gained 0.7 percent, versus a 0.2 percent rise in the benchmark Nikkei .N225.
($1 = 76.655 Japanese Yen)
Additional reporting Lisa Twaronite, Vikram Subhedar and James Topham; Editing by Edwina Gibbs