Bonds News

RPT-Japan to exempt foreigners from corporate bond tax

(Repeats item that first ran on Monday)

* New scheme to cover bonds issued before March 31, 2013

* Step aimed at drawing overseas investors to corporate bonds

* Exemption from 15 pct tax on interest income starts June 1

* Follows tax breaks in past decade on JGBs, municipal debt

* Also covers Samurai bonds, convertible bonds

By Masayuki Kitano and Naoyuki Katayama

TOKYO, May 31 (Reuters) - Japan hopes to lure overseas investors to corporate bonds by temporarily abolishing taxes on interest income starting next month, but analysts say it may face an uphill battle due to low domestic interest rates.

Out of some 68.1 trillion yen ($748 billion) in Japanese corporate bonds outstanding as of March 2009, foreigners held a mere 0.6 percent.

One reason, Japanese Financial Services Agency (FSA) officials say, is that overseas investors have until now been charged a 15 percent withholding tax on interest income they gain from Japanese corporate bonds.

In contrast, overseas investors are in principle exempt from paying such taxes in the United States, Britain, Germany and France.

Japanese FSA officials say they hope the decision to abolish the tax charged to overseas holders of corporate bonds starting on June 1 will help change the picture.

“We do not have a numerical target for measuring success,” Hironori Kawauchi, director of the FSA’s tax office, told Reuters on Monday.

“But we are optimistically hoping that it will be possible to achieve a situation where their performance, in the sense of attractiveness to investors, will not be worse than other financial products, such as stocks, government bonds or municipal debt,” Kawauchi said, referring to Japanese corporate bonds.

The new tax exemption will cover corporate bonds that are issued on or before March 31, 2013, even those that were issued before June. The FSA will aim to eventually make the scheme permanent, Kawauchi said.


The new scheme will also cover debt such as convertible bonds, commercial paper, so-called “zaito” agency bonds issued by government-affiliated agencies, and Samurai bonds -- yen-denominated bonds issued in Japan by non-Japanese entities.

Japan adopted similar tax exemptions for Japanese government bonds in 1999, and for municipal bonds in 2007.

Analysts said a sudden influx of foreign money into Japanese corporate bonds was unlikely, despite the new scheme.

Toshihiro Uomoto, executive director of credit investment strategy and analysis for Nomura Securities, said the tax exemption may help increase demand for Japanese corporate debt among passive-strategy investors overseas.

“Some overseas investors conduct index-based investment in a manner similar to the passive-strategy investment conducted by Japanese pension funds,” Uomoto said.

Some benchmark bond indexes that such overseas passive-strategy investors follow include Japanese corporate bonds. But because of the taxation scheme, such foreign players have avoided buying Japanese corporate bonds until now, choosing to take exposure in JGBs instead, Uomoto said.

That may change, but the impact is likely to be limited to corporate bonds with relatively large issuance lots, he said.

Uomoto and other analysts agree that the biggest hindrance to overseas investment in Japanese corporate bonds is Japan’s low interest rates, and the bonds’ low yield spreads over JGBs.

“I think this measure can be viewed very positively from the standpoint of making it easier for overseas investors to enter the market if interest rates were to rise in the future,” said Hidenori Suezawa, chief strategist for Nikko Cordial Securities.

“But if you ask whether their (market) share will immediately rise because of this, you have to wonder whether that will be the case,” Suezawa said.

Indeed, overseas holdings of JGBs and municipal bonds remain small even though foreigners are already exempt from taxes on interest income earned on such bonds.

As of end-March 2009, in addition to holding only 0.6 percent of Japanese corporate bonds, overseas investors held just 0.2 percent of the 66.7 trillion yen in Japanese municipal bonds outstanding, and 7.1 percent of some 797.7 trillion yen in JGBs.

Such figures pale in comparison with the 25.2 percent overseas players held in U.S. bonds including government and corporate debt and 60.1 percent in British bonds, according to data compiled by Japan’s FSA. ($1=91.05 Yen) (Editing by Chris Gallagher)