Group 1: Historical Capacity Adjustment Cases - The report analyzes three historical cases of capacity adjustment: the Long Depression (1873-1896), the Great Depression (1929), and Japan's capacity reductions in the 1970s and 1990s, highlighting lessons for supply-demand rebalancing[6] - During the Long Depression, nominal wage growth was only 5.4% in the U.S., while industrial output increased over 300%, leading to a significant supply-demand imbalance[10] - The Great Depression saw a shift from non-intervention to government intervention, with policies like the Agricultural Adjustment Act (AAA) and the National Industrial Recovery Act (NIRA) implemented to stabilize production and demand[30][34] Group 2: Mechanisms of Supply-Demand Rebalancing - Capacity imbalances can create a negative feedback loop, potentially lasting 20-30 years if not controlled, as seen in the Long Depression and Japan's lost decades[1] - Government intervention is more effective than non-intervention in addressing capacity imbalances, as demonstrated by the U.S. response to the Great Depression compared to Japan's approach in the 1990s[2] - Successful rebalancing requires simultaneous efforts in controlling capacity, restoring credit, and stabilizing employment, rather than relying solely on supply or demand policies[3] Group 3: Economic and Social Implications - Large-scale supply-demand imbalances can present opportunities for improving labor wages and boosting domestic demand, facilitating a shift from production-oriented to consumption-oriented economies[4] - In the U.S., labor movements during the Long Depression led to wage increases, with wage growth eventually reaching 49% of nominal GDP growth by the late 19th century[26] - Japan's capacity adjustments in the 1970s relied on government-led initiatives, while the 1990s saw a shift towards market-driven solutions, resulting in slower recovery from imbalances[5]

Tax Policy Changes - The Ministry of Finance and the State Taxation Administration announced the restoration of VAT on interest income from newly issued government bonds, local government bonds, and financial bonds starting from August 8, 2025[1] - Interest income from bonds issued before August 8, 2025, will continue to be exempt from VAT until maturity[1] - The VAT rate for bond interest income is set at 6%, with an additional 12% VAT surcharge, leading to a total effective tax rate of 6.34% on taxable amounts[2] Market Impact - The policy change is expected to have a limited impact due to the continued VAT exemption for pre-2025 bonds, potentially leading to short-term institutional buying[1] - The 10-year government bond yield is projected to decline to around 1.5% amid low expectations for large-scale domestic demand stimulus[1] Taxation Details - The taxable amount for bond investments includes both interest income and transfer price differences, with the latter subject to VAT as well[2][3] - Corporate bond investors face a corporate income tax rate of 29.76% after accounting for VAT and income tax exemptions on certain bonds[4] Risk Factors - There are risks associated with fiscal policy implementation not meeting expectations and potential unexpected adjustments to tax incentives[6]