Japan initiates tax reduction plan urged by U.S.

September 23, 1994|By Thomas Easton | Thomas Easton,Tokyo Bureau of The Sun

TOKYO -- The Japanese Cabinet, in a move long urged by the United States, passed a major tax reform package late last night, providing a boost to the country's depressed economy.

Theoretically, the tax cut will enable Japanese consumers to buy more foreign goods, thus reducing the yawning trade deficit it has with the United States and other nations.

Prime Minister Tomiichi Murayama announced the tax package at a news conference, as the U.S.-Japan trade talks try to avert punitive U.S. sanctions on Japan, set for the end of the month.

The Cabinet's tax plan, expected to be passed by Japan's parliament, the Diet, by the end of the year, provides $55 billion in tax cuts, roughly honoring commitments Japan made early this summer to the other major economic powers during a summit in Naples, Italy.

An increase in the sales tax to 5 percent from the current 3 percent will compensate for the tax reduction. The raise will take effect in April 1997. Washington had pressured Japan to defer a sales tax increase so it would not reduce the impact of a tax reduction.

The initial tax-reduction part of the package would maintain cuts instituted last year as part of an emergency bill to pull Japan out of its worst recession since World War II.

Those moves were largely responsible for positive signs emerging in recent months, said U.S. Treasury Undersecretary Lawrence Summers on a visit this week to Japan.

The economy has yet to clearly rebound, however, with the most recent quarter once again showing a contraction in business activity. Lackluster demand in Japan has exacerbated its long-standing trade surplus with other nations.

Ironically, a crucial obstacle to the tax plan crumbled in June when its biggest detractor, the Socialist Party, shifted from decades as the opposition party and gained the leadership of Japan under Mr. Murayama.

Socialist Party members had spent years attempting to scuttle even the 3 percent sales tax, or consumption tax as it is known here, arguing it placed a heavier burden on the poor than the rich.

"It was a very difficult decision," said Mr. Murayama. "As I today hold a position in the government, I made a responsible decision."

The package provoked predictably harsh criticism from other politicians, as well as cries of betrayal from Japan's various consumer groups. It received only muted praise from the country's business community.

During his news conference, Mr. Murayama was bombarded with acerbic questions about his reversal, with one reporter going so far as to ask the prime minister if it should be considered "treason."

The scheduled increase represents a victory for the country's Ministry of Finance, underscoring its reputation as the most powerful institution in Japan.

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