Japan should rethink US$81 billion in banks' tax breaks

Japan should review US$81 billion in tax breaks offered to the nation's banks because they are equivalent to a public bailout and should be treated as such, the head of a government advisory panel said.

The Financial Services Agency last year asked the government to provide lenders with Japanese Yen 9.5 trillion (US$80.8 billion) in tax refunds in its push to halve the level of bad loans at Japan's biggest banks by March 2005.

Japanese regulators are discussing ways to make it easier to bail out banks whose capital has been eroded by bad loans.

Mizuho Financial Group Inc, Japan's biggest lender, and its six main rivals booked Japanese Yen 5.2 trillion in loan disposal costs last year.

"It would be no different from granting public funds," the panel, led by Hiromitsu Ishi, said in a statement.

"If the goal is to boost the lenders' capital, it would be better to debate the necessity of injecting public funds and the conditions attached to it, rather than discussing a tax refund," the panel said.

The tax panel also called for debate on whether to allow provisions that banks make toward bad loans to be tax deductible or not subject to taxation.

Tax authorities don't recognize provisions that banks set aside for bad loans as losses deductible from taxable income until the borrowers actually default. The banks book tax credits to reflect that time lag.

Resona Holdings Inc, Japan's fifth-largest bank, this month received Japanese Yen 1.96 trillion of public funds after auditors rejected the lender's plan to use tax credits it couldn't realistically expect to cover with future profits as part of its capital.

"At a time many lenders are posting losses, making the provisions deductible doesn't change the volume of their deferred tax assets," the panel said in the statement.

"It may even be harmful," it said.