The Diet passed special legislation Friday aimed at reviving Japan's industrial competitiveness by helping industries dispose of excess capacity and rebuild their operations through tax breaks.

The three-pronged legislation to resuscitate industry includes preferential treatment for companies restructuring their operations and spinning off affiliates, state support for small and venture startups, and the so-called Bayh-Dole scheme to transfer state-owned intellectual property rights to the private sector to make better use of research and development.

The legislation, which will remain in effect through the end of March 2003, is expected to take effect Oct. 1.

The bill's passage marks the first step toward state-guided supply-side reform and away from the government's dependence on fiscal and financial measures to stimulate demand.

The legislation includes:

1) measures that will make it easier for companies to spin off businesses, hopefully nudging them to allocate labor and capital to profitable areas;

2) tax breaks or tax rebates for companies that incur losses in scrapping excess capacity;

3) provisions that will allow teetering firms to wipe out portions of their debt by issuing shares to their creditors;

4) measures to increase interest-free loans to smaller firms for equipment purchases;

5) increases in credit guarantees for small firms and venture businesses.

The Ministry of International Trade and Industry and other government offices are preparing criteria and planning to seek public comment on ways to assure fair evaluation of restructuring plans submitted by companies seeking preferential treatment.