Nakasone Will Stress New Tax Plan Ahead of Domestic Demand

Japanese Prime Minister Yasuhiro Nakasone will return to Tokyo today, intent on pursuing tax reform that already has snarled debate in Parliament for three months, he told reporters traveling with him here.

Nakasone also disclosed for the first time that he will seek enactment “by around August” of a supplementary budget, the centerpiece of a 5-trillion-yen ($35.7 billion) fiscal expenditure program designed to expand domestic demand in the economy.

The demand-stimulus package forms the core of promises he made to President Reagan to cut what the two leaders agreed was a “politically unsustainable” imbalance in U.S.-Japan trade.

Tax Gets Priority

The prime minister, however, attached priority to tax reform.

“I want very much to achieve it,” said Nakasone, whose term as president of the ruling Liberal Democratic Party expires Oct. 30. The party post, by tradition, is considered a prerequisite to serving as prime minister.

Nakasone refused to say what he would do to implement the $35.7-billion program of expansion of growth at home in the likely event that debate over tax reform again snarls parliamentary deliberations.

Opposition parties have demanded that Nakasone scrap bills to implement a 5% value-added sales tax and have insisted that any new indirect tax be debated “for two or three years” before enactment.

Made Point Clear

Cuts in income and corporate taxes that he told Reagan would be carried out will be implemented only as part of overall tax reform, including increases in tax revenue through indirect taxes, Nakasone said. He added that he had made this point clear to Administration leaders in two days of talks in Washington on Thursday and Friday.

If an “outlook” for a new tax structure, including increases in indirect taxes, is obtained in discussions with opposition parties, Nakasone said that tax cuts will be included in the supplementary budget. But without such an “outlook,” tax cuts will be excluded, he indicated.

Nakasone pointed to an agreement, hammered out with the opposition parties, by which they ended obstructionist tactics against passage of the fiscal 1987 budget in exchange for a shelving of Nakasone’s controversial sales tax proposal. It specified that the present 73-27 ratio between direct and indirect taxes will be changed to increase indirect taxation. The agreement, however, failed to spell out specifics.

Tax cuts, he said, will be implemented first, before any increase in indirect taxes goes into effect, but not until a new “overall tax structure” is worked out as part of tax reforms.

“I told American leaders that tax cuts had to be part of an overall reform of the tax structure,” he said.

One-Third of U.S. Growth

Although expansion of growth at home creates in Japan only about one-third of the expansion of imports that growth in the U.S. economy produces, the Reagan Administration has made expansion of Japan’s domestic demand its No. 1 priority in negotiations aimed at curtailing the bilateral trade deficit, which last year reached $58.6 billion.

Nakasone indicated that he would seek an extension of the current session of Parliament, now scheduled to end May 27, to enact both tax reform and the $35.7-billion program of fiscal spending as soon as the upper house finalizes approval of the regular 1987 budget. His reference to enactment of the supplementary budget “by around August” indicated that the extension would be a lengthy one.

Nakasone also faces a host of challenges to carry out promises he made to Reagan to solve individual U.S.-Japan trade disputes.

Although the 68-year-old leader enumerated the most extensive series of measures designed to cut Japan’s trade surplus and shoulder a greater burden in world economic affairs that any Japanese prime minister has ever made in Washington, only one of his promises spelled out details in full. That was a pledge to cut in half Japan’s tariff on imports of chocolates, reducing it to 10% effective next April 1.

The most dramatic of Nakasone’s pledges involved not Japan’s trade surplus but, rather, Japan’s burgeoning accumulation of capital.

Will ‘Recycle’ $20 Billion

Over the next three years, Nakasone said that Japan would “recycle” $20 billion to developing nations, in addition to $10 billion it pledged in December, to provide to a special fund of the World Bank for loans to indebted nations. The total of $30 billion in credits to developing nations marked a significant departure from Japan’s present overseas investments, which have been concentrated almost entirely in purchases of securities in the United States and Western Europe.

But even that pledge was made with the details yet to be worked out, a Foreign Ministry official, who asked not to be identified, admitted privately.

On four items that Reagan himself listed as focal points of American interest, Nakasone either made incomplete or negative responses. On a fifth Reagan request, he made no response at all.

Nakasone explained actions which held out a hope--but not assurances--for solutions to Reagan requests for American firms’ participation in construction of a new $7-billion Kansai (Osaka region) airport and a new international telecommunications company, as well as procurement by Japanese universities and government agencies of American super computers.

But to a Reagan request for more Japanese purchases of coal, Nakasone replied by demanding that American producers reduce prices by at least $5 a ton to narrow the gap between prices at which Australia and China are offering to sell coal to Japan.

No Comment on Request

On Reagan’s request for more purchases of natural gas, Nakasone made no comment.

The big question remained when, and by how much, Japan would turn around its trade surplus with the United States.

Now on record for the first time as recognizing the surplus as “politically unsustainable,” Nakasone held out the hope that an appreciation of the yen would soon bring about a decline in the dollar value of Japan’s monthly black ink. The appreciation of more than 70% in the value of the yen in the last 19 months slashed the yen value of exports to the United States last year for the first time in six years, offering the hope for a near-term decline in dollar value surpluses, he said.

Adding in the effect of his planned package of domestic demand-boosting measures--the equivalent of 1.5% of Japan’s gross national product--Nakasone described a turnaround as a certainty.

But even if his prediction proves correct, the timing of a reduction in monthly surpluses remained a vital, and unanswered, question.

U.S. Trade Representative Clayton K. Yeutter told Nakasone in Tokyo before his American trip that evidence of a turnaround must become clear by September, when the Senate is expected to vote on an omnibus trade bill, to stave off protectionism in Congress.

None of Nakasone’s promised new measures will produce any new effects by then, however.