NEWS ANALYSIS : Execs Nervous About Japan’s Next Leader : Politics: Although Morihiro Hosokawa has pledged to tackle all issues, some question his ability to manage the economy.

As Japan’s new prime minister-designate, Morihiro Hosokawa, prepared Friday to lead a coalition government, business leaders here questioned whether the former provincial governor is up to the difficult task of managing Japan’s ailing economy.

Business executives are particularly concerned that Hosokawa and his coalition’s single-minded focus on electoral reform would result in their giving short shrift to the economy.

“Political reform remains our top priority but we must be ready to tackle all the issues as vigorously and effectively as possible,” Hosokawa told reporters outside his Japan New Party headquarters here.

But with Hosokawa representing eight parties--an odd alliance including right wing ruling party dissidents and leftish Socialists--the new government is widely expected to be weak and short-lived.

“Political instability is a big hazard,” Akio Morita, chairman of Sony Corp., recently told a small group of foreign correspondents, expressing concerns over the ability of the coalition to develop and follow through on long-term policies. “Economic growth depends on (consumer) psychology. With an unstable political situation nobody can look ahead.”

“Our business has been getting worse since April,” said Minoru Murofushi, president of trading giant C. Itoh & Co. “We need strong leadership by the government to reverse the trend.”

It is also far from clear how Hosokawa will move on issues of key concern to the United States, such as a proposed cut in personal income taxes, which some believed to be necessary to stimulate Japan’s domestic economy. He has also voiced support for opening Japanese markets, but his specific proposals are unclear.

Hosokawa has been an aggressive proponent of deregulation and decentralization, measures considered critical both to Japan’s long-term health and to greater access to Japanese markets by American businesses.

He has also been a harsh critic of Japan’s bureaucracy, which he says has a narrow focus on regulations and their own authority instead of the broad problems of the nation. Hosokawa once suggested cutting off the water supply to Japan’s key ministries to underscore the importance of breaking the power of Japan’s top bureaucrats.

But as Hosokawa has come closer to power, the crusader for change has, at least on economic issues, sounded far more like a conservative insider than an independent reformer.

In recent campaigns for parliamentary elections, Hosokawa backed income tax cuts as a means of boosting consumer spending. But speaking on television Thursday, he appeared to be supporting the more cautious Finance Ministry bureaucrats who are concerned that a tax cut would lead to budget deficits.

American officials and local economists have been urging Japan to adopt such a tax cut as the quickest way to boost economic growth so that the nation could absorb more imported goods and reduce its soaring trade surplus.

“If they don’t (cut taxes), the economy will continue to decline,” warns Tetsuo Tsukimura, chief economist at the Tokyo office of the Smith Barney Harris Upham & Co. brokerage.

Although government officials continue to predict a gradual recovery, most private economists agree with Murofushi that Japan’s economy dipped back into recession in late spring after showing a weak rebound in April. Private forecasts for GNP growth in 1993 are as low as 1%, far below the government’s official 3.3% forecast.

Analysts said a $120-billion package of economy-boosting measures adopted in the spring have been slow to have an effect because a wave of corruption scandals in the construction industry has slowed down the pace at which contracts could be awarded.

While tax cuts would be more effective, powerful bureaucrats in the Finance Ministry have expressed their strong opposition to using such policies to boost the economy because of the dependence on personal income taxes for government revenue. The top 5% of individual taxpayers account for 40% of total government revenue.

“With this kind of unstable political situation, there is no way we could agree to (income) tax cuts without increasing (other) taxes at the same time” to cover revenue losses, said one tax official at the Finance Ministry. He suggested that the new government might cut taxes but then fail to get the necessary public support to raise other revenue.

Earlier proposals had called for an income tax cut to be implemented next April with tax revenues made up for through an increase in consumption taxes to be implemented the following year.

That would allow a one-year period during which taxpayers would have more spending power. The consumption tax would catch certain Japanese professionals, including doctors, speculators and others who evade taxes by hiding income. Finance Ministry officials say they fear a populist-oriented government would go ahead with an income tax cut, but fail to follow up with the consumption tax.

“When you look at America, it took a decade after Reagan’s tax cuts in 1983 before America was able to raise its taxes again,” the official said. “There was a lot of damage done during that period.”

Some Japanese officials also believe that their last experience with artificially boosting the economy provides a cautionary lesson.

In a recent 478-page report, Japan’s Economic Planning Agency said that the quick artificial reflating of the economy in 1987 after a yen appreciation caused a recession, put too much money in circulation and led to the late 1980s speculative boom. The collapse of the boom has slashed stock and land values by $3.8 trillion and plunged Japan into its current recession, the agency argued.