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Lawmakers Seek Steps to Lift Tokyo Stock Market

A group of ruling party lawmakers urged Japan's government on Thursday to scrap taxes on dividends and capital gains and take other steps to reverse a 30 percent slide in the Tokyo stock market over the past six months.

The whiff of possible action helped push up the Nikkei 225 Average to close 2 percent higher, but market players and economists doubted if all the proposals by the Liberal Democratic Party lawmakers could or even should be implemented.

The group of legislators, including former financial services agency minister Yuji Yamamoto, also called on the Bank of Japan (BOJ) to cut interest rates and the government to consider establishing a sovereign wealth fund.

"If they could carry out these proposals it would be incredible, but I don't think anybody in the market believes they really will. After all they'd lose a lot of tax money, and how would they keep the government going then?" said Masayoshi Okamoto, head of dealing at Jujiya Securities. "This is positive not for its content but for the message it sends, that the government and Bank of Japan are ready to do something aggressive."

The lawmakers also urged financial firms to consider exempting or cutting fees on stock trades to attract retail investors and proposed other tax breaks, including on capital spending and income tax.

The proposals, which were submitted to Chief Cabinet Secretary Nobutaka Machimura, call for the steps to be in place until the Nikkei recovers to 18,000. It was around 13,000 on Thursday.

Yamamoto told reporters the authorities' reaction to the stock market slide has been too tepid. "In particular, their comments are very weak as an international message," he said, adding that the government should craft a menu of possible steps.

"That is very important in the sense of protecting the Japanese market and preserving individuals' financial assets."

Limited Options, Stalled Reforms

The Nikkei was above 18,000 just six months ago, before the U.S. subprime mortgage crisis deepened, raising fears of a recession that could spread to other economies such as Japan.

Economists said extending or deepening tax breaks on dividends and capital gains would be a plus for the market, but warned against politicians prescribing monetary policy or proposing measures that appeared to be a market bailout.

Fears of a U.S. recession, market mayhem and weak housing investment at home due to tighter building rules have almost wiped out expectations for an interest rate hike in Japan this year, and markets are now pricing in a possible rate cut instead.

High-profile political pressure on the BOJ could backfire, said Martin Schulz, a senior researcher at Fujitsu Research Institute. "Such proposals could even decrease the odds (of a rate cut). It's a stupid thing to say."

With the key overnight call rate at a mere 0.5 percent, any cut would be mainly symbolic, economists said. "My view is that the next move is likely to be down, not up, but I don't think their room for maneuver is enough to affect stock market expectations much," said Morgan Stanley chief Japan economist Robert Feldman.

Ruling party lawmakers worried about Prime Minister Yasuo Fukuda's sagging popularity given talk of a snap election this year may be keen to be seen taking action on the stock front. But economists say stalled economic reforms and the policy paralysis born of a divided parliament were more fundamental problems.

Opposition parties who won control of parliament's upper house last July and can now delay legislation are pressing for an early lower house poll in hopes of ousting the ruling bloc.

"They can't do anything so they have to talk a lot," Schulz said, referring to the ruling politicians.