Surprise tax cuts, spending plan get mixed reaction Hashimoto is praised, but critics question if package is enough



TOKYO -- Prime Minister Ryutaro Hashimoto, facing criticism for sticking to a strategy of fiscal austerity while Japan's economy stands on the brink of recession, stunned his critics yesterday with a surprise package of tax cuts and public spending.

But even as he won praise for changing course, questions quickly arose as to whether his measures were bold enough.

The package includes two trillion yen in income tax cuts -- $15.75 billion at current exchange rates, roughly the same amount in spending for public works, and 840 billion yen, or $6.6 billion, in tax cuts for corporations, land owners and investors. In all, the prime minister has proposed a stimulus package worth around $38 billion.

It was cobbled together in less than 24 hours, after the Japanese stock market failed to react to leaked reports of a much less ambitious economic plan that would have included just reductions in corporate, land and securities-transaction taxes.

Not all of Hashimoto's critics, or financial analysts, were mollified by the new package, which includes only about $300 in cuts a year for each Japanese family, and may not be immediately translated into a sufficient stimulus to prime the stalled economy. "It was a necessary step, but it's pretty clear Hashimoto was dragged to it kicking and screaming," said Alexander Kinmont, a managing director of Morgan Stanley Japan.

The announcement took bureaucrats here by surprise. Hashimoto returned to Tokyo late Tuesday night from a meeting with Asian leaders in Malaysia, and he began waking colleagues with phone calls to brief them on his plans.

Bureaucrats from the Finance Ministry polled economists and journalists on Tuesday to get an idea of how certain proposals might be received. That may have led to the additional two trillion yen in public works spending tacked on late yesterday afternoon, apparently in response to analysts' assessments that even a sizable income tax cut, combined with the lowest corporate tax rates since World War II, was not enough to push the economy into a recovery.

Sakakibara suggested that the package would increase Japan's gross domestic product by at least 1 percent, given that tax cuts usually have an effect beyond their monetary value.

Private economists were less rosy. They estimated that more than half of the income tax cut would find its way into savings accounts, not store cash registers. In 1994, when the government cut taxes, the savings rate jumped 14 percent after having been flat for the previous three years.

The tax cut announced yesterday is to be for one year only, as Hashimoto made very clear.

And the $300 it would save each taxpayer is to come next June, curtailing any immediate benefit to the economy from increased consumer demand. "It's not enough to create a self-sustaining recovery or send the stock market soaring to new heights," said Mineko Sasaki-Smith, an economist at Credit Suisse First Boston.

The United States was pleased that Hashimoto had taken at least some action. The prime minister received a call from President Clinton, and Mike McCurry, Clinton's spokesman, praised the measures as a financial package "good for the people of Japan and good for the regional economy of Asia."

Skeptics conceded that any sign of movement on the part of the government would be greeted with relief.

"It's about 1 percent of gross domestic product, but that's really not the point," said Ronald Bevacqua, a Merrill Lynch economist here. "Given how pessimistic everyone has been, this may actually give people some sense of hope. It's about sentiment as much as anything."

The plans for the two trillion yen in public works, which will be contracted and paid for this year, are likely to be controversial. The government has come under criticism for spending on unnecessary bridges, tunnels and the like that have kept Japan's bloated construction industry afloat for the last few years.

The prime minister succeeded in winning applause from critics for his pluck, and got a somewhat more muted reception for the package itself. "I have to think Hashimoto has been wringing his hands over this one a long time," said John F. Neuffer, a political analyst at the Mitsui Marine Research Institute here. "And his timing was so perfect: he rolls in after the party lackadaisically throws together a package that was sure to be criticized, and steals the show."

In response, the benchmark Nikkei index of 225 stocks soared more than 700 points after news of the tax cut got out, and although the index retreated some, still closed with a 3.4 percent increase.

The yen, which has slipped substantially against the dollar, rose as the Japanese central bank moved swiftly, selling dollars and buying yen, to take advantage of the element of surprise.

In the last month, the economy took a turn for the worse. Four large financial institutions collapsed in November. The yen had its biggest drop in years. Stocks began reaching a level that threatened to bring even more banks to their knees. The United States and the International Monetary Fund politely suggested that while Japan's efforts to get its house in order were admirable, perhaps they were mistimed.

Stung by charges that he had flip-flopped when he decided to use public money to shore up the financial system, the prime minister held steady. Not until a group of young party mavericks began suggesting Monday that he could avoid the appearance of going back on his word because the Fiscal Consolidation Law did not go into effect until April did Hashimoto decide to risk great political trouble by scuttling the commitment to fiscal austerity.

Pub Date: 12/18/97

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