Japan Promises Several Steps to Aid Economy : Recovery: Government statements aimed to reverse a tailspin in the Nikkei stock average.

Amid deepening gloom over the economy, the government of Prime Minister Morihiro Hosokawa on Tuesday made its strongest pledges yet to take emergency action to spark a recovery.

The statement helped bring at least a temporary halt to a weeks-long slide in the Tokyo stock market. The benchmark Nikkei 225-stock index closed Tuesday at 16,406.54, up 327.83 points, or 2.04% from Monday’s close. At midday today, it was up another 277.83 points to 16,684.37.

Hosokawa, speaking to parliament Tuesday afternoon, said the economy is “in an unpredictable and very serious condition.” Hosokawa indicated support for an income tax cut next year and for measures aimed at revitalizing securities and financial markets, but provided few details.

Later, in a meeting with the influential former chairman of Nomura Securities, Setsuya Tabuchi, Hosokawa said the government will allow companies to purchase their own stocks, Japanese media reported. This is a move strongly favored by Japanese business.

Hosokawa also said it was “likely” that he might now aim to pass additional economic stimulus measures before achieving passage of a key political reform package, which he has pledged to get through parliament before the end of the year.

The government seems to be keeping its main focus, however, on long-term policies rather than quick steps to reverse the plunging stock market.

Earlier Tuesday, heads of two powerful ministries, Finance Minister Hirohisa Fujii and Minister of International Trade and Industry Hiroshi Kumagai, held a special meeting to discuss steps to rejuvenate the economy. They emerged to tell reporters that they would study measures to help banks cope with bad real estate loans. At a separate press conference, Bank of Japan Governor Yasushi Mieno, the central bank head, announced plans to lower money market rates.

The statements were aimed at reversing a tailspin in the stock market under which the Nikkei average had dropped 647.66 points, or 3.87%, on Monday to close at its lowest level in more than a year. The market is now slightly more than 20% below its mid-September level.

“The government’s reaction today I think has been very forthright,” Robert Feldman, an analyst at Salomon Brothers Asia Ltd., commented Tuesday. “They’re listening to the market. I think there’s a full-court press from the policy makers to say they do take things seriously.”

Officials stressed, however, that they aim primarily at addressing fundamental economic problems, rather than using more direct methods to prop up the stock market such as an infusion of government-controlled pension funds.

“Taking appropriate measures to sustain the economy is the best way to help the stock market,” Fujii said.

Along with the signs of growing government determination to take action came a new wave of unfavorable economic statistics released Tuesday:

* Industrial production in October fell 5.1% from September for the largest monthly decline since such statistics have been kept. The previous record fall was 4.0% in January, 1975.

* Unemployment climbed to 2.7% in October, the highest level in nearly six years. While low by U.S. standards, under the Japanese system this level of unemployment marks severe economic distress.

* Net business profits at Japan’s 10 top regional banks for the fiscal half-year ended in September were down 12.4% from a year earlier.

These fresh statistics come against a background of sharply depressed corporate income and a 25% plunge in Japan’s October automobile exports, attributable partly to a strong yen.

The mood of gloom was both illustrated and reinforced by a front-page report Tuesday in the influential economic-oriented newspaper, Nihon Keizai Shimbun, quoting estimates by the Japan Economic Research Center indicating that the economy will contract at an annual rate of about 3.3% during the second half of this year. Other estimates have foreseen a less severe drop in production.

“The Japanese economy is very bad after a two-and-a-half-year downward trend,” said Kenji Mizutani, chief economist at Tokai Research & Consulting Inc. “We do not yet have any signs of a recovery . . . The focus of the Japanese economy has become very pessimistic, and this is reflected in the prices of stocks, and the fall of the stock market creates pessimism, and this affects the economy.”

One major problem affecting the economy is that many banks are stuck with non-performing loans secured by real estate that has fallen sharply in value since the “bubble economy” days of the late 1980s, when most of these loans were made. Many banks had been counting on writing off some of these bad debts using profits from stock holdings that, until recently, had increased in value this year.

“Their unrealized profits have been sharply reduced,” said Shigeru Akiba, an analyst at UBS Securities. “I think the biggest threat would be some bank’s bankruptcy, which would lead to fears for the Japanese financial system.”

Akiba said investors expect to see government action on the economy, but “we don’t know how much and when.”

Hosokawa has pledged to push a package of political reform bills through parliament by the end of this year. The package passed the lower house two weeks ago, but the original target deadline of Dec. 15 for upper house passage now seems unattainable.

The government is also committed to passing, before the end of the year, a supplementary budget with an outlay increase of 709 billion yen ($6.6 billion) to offset tax revenue shortfalls and fund some previously approved stimulative measures.

Jesper Koll, an analyst at S.G. Warburg Securities, said the government seems to be moving toward a three-pronged approach to rejuvenating the economy: a tax cut, widely expected to be in the range of at least 5 trillion yen ($46 billion); new public expenditures in the range of 2 trillion yen, and a further cut in the central bank’s discount rate to 1.25% from 1.75%.

While Ministry of Finance officials had been calling for any income tax cut to be balanced by a consumption tax increase, signs are growing that any corresponding hike will be delayed in order to obtain the desired fiscal stimulus, Koll said.

Some analysts believe that such a package would be enough to get the economy moving again.

But others are more pessimistic.

“Even if such steps are taken, the total effect will be very small--too small to raise the economy,” Mizutani said.

“The Japanese people want to raise up our economy. But there is no way.”