ANALYSIS : Competing Goals Hinder Recovery From ‘Bubble’ : Japan: The government can attack the recession by propping up stock prices. But it has promised to promote a freer market.

Prodded into action by plunging stock values, Japan’s reformist coalition government scrambled last week to put together an economic rescue package capable of pulling the country out of recession.

The government has immense ability to intervene in the stock market and the economy by propping up share prices with public funds or pumping up overall economic activity through fiscal stimulus.

But a key commitment of the shaky seven-party ruling coalition is to push deregulation and restructuring, so as to promote freer play for market forces, better relations with trading partners and, ultimately, greater efficiency.

To be sure, no action is expected immediately. Prime Minister Morihiro Hosokawa said this morning that he has no specific stimulus measures in mind “at the moment” and denied widespread reports that the government will announce an additional package of economic stimulus measures this week.

Yet the government still hopes to spark the economy and stem the stock market slide using measures in keeping with these goals.

How successfully Hosokawa copes with this challenge will determine how quickly Japan escapes its worst recession since the years shortly after World War II.

That in turn will affect Japan’s appetite for foreign goods--a key concern of the Clinton Administration, as it seeks to create more American jobs through expanded exports. The Administration for months has urged Tokyo to take more aggressive steps to promote economic growth.

The coalition headed by Hosokawa, which came to power in August, wanted to focus first on passage of political reform measures aimed at attacking the country’s endemic political corruption.

But economic issues have forced their way to the forefront, eclipsing the political reform drive. Soon after taking office, Hosokawa said he would “take political responsibility”--meaning resign or call new elections--if he failed to meet a self-imposed end-of-year deadline for enactment of political reform.

It now seems likely he will miss the deadline but will hang on to his post, at least into January.

But this looming failure to win the promised quick success on political reform contributes to overall uncertainty about the government’s stability, including its ability to carry out appropriate economic policies.

“They are now flustered and in a very serious way are losing confidence in themselves,” Minoru Morita, a prominent political commentator, said in describing the current mood of the Hosokawa cabinet.

Japan’s current recession was to a large degree touched off by the government itself, which took steps in 1988 and 1989 to sharply boost interest rates and to impose heavy taxes on profits from speculative real estate deals. The government also cut back on deficit spending. These measures succeeded in cooling off the overheated “bubble economy” of the late 1980s, but the downturn soon began to feed on itself.

The government persisted in seeking to balance its operating budget by raising taxes and controlling expenditures, bringing the annual deficit down to zero by 1991. Since then, the powerful bureaucrats at the Ministry of Finance have resisted all efforts to prime the economy through new deficit spending.

Early this year, most analysts believed the economy would soon begin a modest recovery. But then the value of the yen surged, hitting exports hard. This left Japan unable to escape its economic difficulties through boosting exports, a key method in previous recessions. An exceptionally cool summer, which hurt agricultural production, added to the difficulties. After 2 1/2 years of recession and a recent wave of gloomy economic statistics, plunging share prices early last week forced the government to give up its attempt to maintain a fully hands-off approach to the stock market and a long-term approach to economic issues.

The market recovered by the end of the week with the Tokyo Stock Exchange’s Nikkei 225 average closing Friday up 0.60 at 17,459.35.

The outlines of a new economic stimulus package are expected to be released as early as Tuesday. Due for inclusion are an income tax cut, relaxation of rules on real estate transactions and steps to support the stock market.

Some of what the government appears to be contemplating fits its proclaimed goal of deregulation. Other aspects--such as measures to allow speculators to keep greater profits from land sales--seem to be more of a return to policies that contributed to the late-1980s speculative boom.

“Obviously, there is growing confidence that the appropriate counter-cyclical measures will be taken--income tax cuts financed by deficit spending, and lower interest rates,” commented Jesper Koll, an analyst at S. G. Warburg Securities.

Still, the Hosokawa government faces a complex set of interlocking policy problems, and it remains unclear whether it can find a way out.

* The political reform package has cleared the lower house of Parliament but faces difficulties in the upper house, primarily due to opposition from some Socialist members of the ruling coalition.

* The government wants to use income tax cuts to boost the economy. But it is also determined to eventually impose a consumption tax increase. This is because officials believe that as Japan’s population ages, it is essential to shift part of the tax burden from salaried employees to retirees with enough money to sustain high expenditures. This long-term goal conflicts with the short-term need for fiscal stimulus.

The compromise is likely to be acceptance of a period in which deficits are used to finance the income tax cut. But general knowledge that a consumption tax increase lies down the road may chill the effect of the income tax cut.

* The United States is demanding that Japan agree to a gradual opening of its rice market, to provide access for more imports and help facilitate a successful conclusion to world trade negotiations under the General Agreement on Tariffs and Trade, which face a Dec. 15 deadline. Hosokawa seems inclined to agree but faces fierce opposition from within and outside of his government.

All of these issues spark divisions within Hosokawa’s coalition, which rules by only a narrow majority in the powerful lower house of Parliament.