Japan Premier Does Turnabout on Tax Package

Japanese Prime Minister Morihiro Hosokawa today abruptly backed down from a tax package proposed just one day earlier to jump-start the flagging economy, a stunning turnabout meant to quell a political backlash that had threatened to destroy his ruling coalition.

Hosokawa’s reversal on plans to enact a $49-billion tax cut, and a new welfare tax to finance it, came after hours of fruitless negotiations with the Socialists, who had threatened to quit the coalition.

It underscored a mounting power struggle within his coalition that seems headed toward sweeping political realignments in the coming months.

The brouhaha is likely to weaken Hosokawa just days before his Feb. 11 summit with President Clinton.

Until now, Hosokawa has enjoyed sky-high public approval ratings despite taking controversial steps to open Japan’s sacrosanct rice market and pass a severely watered-down political reform package.

Critics said his growing confidence--and a tendency toward imperious rule stemming from his family’s royal history--led him to commit what could become the most serious political miscalculation of his administration.

“The prime minister must have been drunk on his own high public approval ratings,” said Construction Minister Kozo Igarashi, a Socialist.

Hosokawa’s backpedaling is likely to displease Japan’s industry and trading partners, who have been urging a tax cut to combat the worst recession in two decades.

Although chances remained that an economic stimulus package could still be announced later in the day, it will not contain the critical component of the tax cut.

In Tokyo, U.S. Trade Representative Mickey Kantor, who had praised Hosokawa’s tax cut plan when it was released, expressed hope that an economic stimulus program will still be forthcoming very soon.

The U.S. government has urged a tax cut to stimulate consumer spending and help shave Japan’s $50-billion trade surplus with the United States.

The stock markets barely responded, however, as traders said that many had not heard the news.

“I think the short-term effect for the market will be disquiet,” said one trader at James Capel & Co. “The coalition looks shaky once again.”

The tax package, which would have enacted a 7% tax on goods and services in April, 1997, replacing the 3% consumption tax, had drawn fierce opposition from a broad array of critics.

The Socialists, the coalition’s largest party, had threatened to quit the coalition over the new tax.

But Hosokawa’s own Japan New Party members and those of its ally, Masayoshi Takemura’s New Party Harbinger, opposition Liberal Democratic Party members, many of Japan’s major newspapers and many citizens had also voiced protest.

Some tabloids presented screaming headlines about the “Hitler-like” tactics used to decide on the plan and announce it in the wee hours of the morning.

The controversy illuminated a growing split among the partners in the government coalition.