The generalised system of preferences, a form of support for developing economies, imposes minimal to no duties on selected industrial and other products. These reduced tariffs currently apply to 143 countries and territories, the report said.
The other countries to be removed from the list are China, Mexico, Brazil, and Thailand. The change takes effect in fiscal 2019.
News of Malaysia being dropped from the preferential tariff list comes just a day after Malaysian Prime Minister Najib Razak completed a three-day visit to Japan where both countries spoke about enhanced ties.
These five countries account for 30 billion yen (RM1.2 billion) of the 33 billion yen in revenue Japan loses from the tariff scheme, NAR reported.
According to the report, the framework already provides for “graduation” upon reaching a certain level of economic development.
Beneficiaries are removed from the list if they are classified as high-income economies by the World Bank for three consecutive years.
The Finance Ministry is to add another rule excluding countries whose share of global exports is 1 per cent or higher and whose income exceeds a given level for three straight years.
Japan was following the lead of the European Union and Canada, which had scaled back preferential tariffs in recent years, said the NAR report.