Compromise on tax cut saves Japan's coalition

February 08, 1994|By Thomas Easton | Thomas Easton,Tokyo Bureau of The Sun

TOKYO -- A tentative compromise yesterday over an economic stimulus program rescued Japan's shaky coalition government from dissolution.

Under the agreement, the coalition agreed to push ahead with a $55 billion reduction in income taxes. The most contentious issue, how to fund the program, was shelved until later.

The compromise by coalition leaders opened the way for the approval of a long-awaited spending plan to help Japan out of its economic doldrums. That sent Japan's stock market soaring today.

The package of government spending and tax cuts had become the most recent issue to undermine the thin consensus binding Japan's coalition of seven parties.

To revive Japan's ailing economy, government officials have floated numerous ideas about spending packages, but all have had to confront sharp reservations from Japan's powerful Ministry of Finance for the negative long-term consequences of deficit spending, particularly in light of the anticipated consequences of Japan's aging work force, future tax revenues and welfare obligations.

U.S. officials have repeatedly urged Japan to institute a large government spending program to revive spending, and many in Japan's government have hoped to have such a package in place before Mr. Hosokawa leaves for Washington Thursday.

U.S. officials officials believe a tax cut will spur purchase of foreign products, which could help trim Japan's huge trade surplus.

But Japan's bureaucrats have argued that the United States has created numerous problems for itself by just such deficit spending. Moreover, they argue that the problems within Japan's economy are not the kind to be resolved by government spending.

Last week, in an a 1 a.m. announcement, Prime Minister Morihiro Hosokawa outlined a plan for immediate tax cuts and spending, to be offset in three years by an increase in a sales tax from 3 percent to 7 percent in 1997.

Many in Mr. Hosokawa's coalition had not been informed about the tax cut plan until immediately before the announcement and were outraged. The largest coalition faction, the Social vTC Democratic Party, threatened to quit, and other parties were equally, if not as vocally, annoyed.

A day later, Mr. Hosokawa retreated, saying he was willing to compromise.

Early today, an adviser to one of the dominant government factions said there was little choice but go along with some economic stimulus plan to prevent further disarray, but were deeply troubled.

Mr. Hosokawa's visit comes amid strained trade talks with the United States. U.S. and Japanese negotiators are holding a last-ditch round of talks in Washington this week to try to reach an accord before President Clinton and Mr. Hosokawa meet Friday, but the two sides remained far apart on key issues.

The Japanese are strongly resisting the key U.S. demand: the imposition of numerical goals to measure progress in the opening of Japan's markets.

"We must have a prompt, substantial and continuous increase in access and sales of foreign competitive goods and services, and we must be able to measure the results," said U.S. Trade Representative Mickey Kantor during a visit here last week.

If those goals are not achieved, Mr. Kantor said, "we would have to look to other options."

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