Japan’s Premier Bows to Socialists and Scraps Tax Hike

Japanese Prime Minister Morihiro Hosokawa today bowed to Socialist demands to temporarily scrap a tax hike intended to pay for a $49-billion income tax cut to boost the sluggish economy.

The move averted a collapse of Hosokawa’s 6-month-old coalition government.

Hosokawa will now be able to meet President Clinton on Friday with a substantial tax cut proposal and an overall $140-billion economic stimulus package in hand. Washington had urged both measures to stimulate Japanese consumer spending and shave Japan’s politically nettlesome trade surplus, estimated at about $55 billion last year.

However, it was not clear whether the measures will satisfy Washington, as unconfirmed reports indicated today that the tax cut may last only one year. U.S. Treasury Secretary Lloyd Bentsen earlier had said that a temporary tax cut would be unsatisfactory.

Still, it was the quickly encroaching U.S.-Japan summit that forced parties here to break their political deadlock and end the turmoil that had paralyzed this nation since Hosokawa made his surprise tax proposal last Thursday.

At that time, the prime minister abruptly announced at a 1 a.m. news conference that the tax cut would be financed by a new 7% “people’s welfare” levy on goods and services. Outraged Socialists, the coalition’s largest group, promptly threatened to quit the government, and the ensuing public outcry sent the popular Hosokawa’s approval ratings plummeting.

“The U.S.-Japan summit can be characterized as the savior of the Hosokawa administration,” said Minoru Morita, a political analyst.

Under the plan, the typical family will get a tax cut of about $1,300, but whether Japanese consumers will spend it or save it amid the nation’s grimmest recession in two decades is unclear.

“Even though a certain portion of this tax cut will certainly be saved, I think it will have a beneficial effect on consumer demand,” said Kunio Miyamoto, chief economist at Sumitomo Life Research Institute.

He added that despite the political infighting, Hosokawa should be given credit for making difficult policy decisions--from opening the rice market to political reform to the tax issue.

The Tokyo stock exchange responded well to the tax agreement. In midafternoon trading, the Nikkei index was up by 306 points, or 1.5%, to 20,320.

“I think this tips the balance to a recovery,” said Geoffrey Barker, an analyst with Baring Securities Ltd. Barker predicted an economic growth rate of 2% in the fiscal year beginning April 1.

The decision marked an extremely rare triumph of politics in Japan, a nation controlled by unelected bureaucrats. In accepting Socialist demands to scrap the tax hike for at least a year, Hosokawa and his coalition partners defied mandarins of the Ministry of Finance--commonly regarded as Japan’s strongest political power.

Finance bureaucrats had adamantly opposed cutting taxes without securing a way to pay for the cut at the same time. The government also wants to reduce its dependence on income taxes in favor of consumption taxes to cushion its national treasury when the number of retirees begins to mount. Japan’s society is aging faster than any other in the world.

A majority of Japanese in several recent polls seemed willing to accept a tax hike to pay for a tax cut and the aging society. But they hotly objected to the imperious way the program was suddenly pushed on them with virtually no debate or explanation.