Originally created 04/10/98

Experts criticize tax cuts

TOKYO -- Prime Minister Ryutaro Hashimoto's tax cut amounts to about $340 in savings this year and next for the average household -- not enough, economists say, to reverse the country's slide.

Nonetheless, the stimulus package marked a politically embarrassing departure from Mr. Hashimoto's policy to cut Japan's mammoth national debt and received a cautious welcome in Washington, which has been urging aggressive measures to lift the Japanese economy.

The proposal calls for $30 billion in tax cuts during the next two years as part of $76 billion that would be pumped into the economy.

"I think that's peanuts," Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis, said of the tax cut. "Consumers are likely to save rather than spend it because of pessimism" about the economy.

The United States and Asian leaders have insisted that Japan must move boldly so its consumers can buy more and help Asian neighbors out of their worst financial crisis in decades.

"We look forward to seeing the details later this month. What is crucial is that Japan move quickly to put in place a strong program," U.S. Treasury Secretary Robert Rubin said.

Once foreign exchange trading started in New York, the Bank of Japan sought to add to the impact of the tax cut announcement by buying yen to prop up the currency's value. Mr. Rubin welcomed the intervention, but there weren't any indications the U.S. Federal Reserve also was trying to lift the yen.

Washington has been pressuring Japan to lift its economy without taking advantage of the weak yen to boost exports. While the pressure has irritated Japanese officials, Japanese business leaders have been pushing for changes to reverse a seven-year slump that has taken a heavy toll on consumer and business confidence.

Mom-and-pop stores are going bust. Middle-aged company workers, once confident that a job was forever, are finding themselves squeezed out of work as more and more businesses restructure to adapt to harsher economic times.

On Wednesday, the Organization for Economic Cooperation and Development warned that Japan was on the brink of a recession and could expect its economy to shrink by 0.3 percent in 1998.

"Our economy is in a serious state" Hashimoto told reporters. "To respond to the strong wish of the people to make the economy better, I have decided to implement measures to restore trust in our nation's economy."

But analysts said the tax cuts were not enough to send people out buying.

Last year, Japan passed a one-time income tax cut of $15 billion. Experts criticized that plan, saying consumers would save the money rather than spend more.

"He made the same mistake again," said Shigenori Okazaki, an analyst at SBC Warburg.

One of the pillars of Hashimoto's agenda has been to put the country's finances in order by early in the next century. Thursday's move means he will have to abandon those plans, at least for now.

The policy U-turn could reinforce the image of an indecisive administration mired in the politics of compromise in a desperate attempt to reconcile the irreconcilable: balancing the budget and jump-starting growth.

Hashimoto's vague promise to lower Japan's corporate tax rate to "international levels" in the next three years also worried analysts. Senior members of the prime minister's own party had called for immediate corporate tax cuts tozz the U.S. and European rate of about 40 percent. They now are 46.35 percent.

Before Hashimoto spoke, the Tokyo Stock Exchange's main index climbed one percent, closing at 16,536.66, in anticipation of tax cuts.


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