Tokyo, You Call That Bold?

“I have said both at home and abroad that we will not let Japan trigger a worldwide depression. We decided that a bold policy needed to be considered.” With those words, Prime Minister Ryutaro Hashimoto unexpectedly declared an emergency personal tax cut of $15.5 billion last week. The announcement made good drama but in no way convinced the nation, and those looking to it from abroad, that the Hashimoto government has emerged from its prolonged inertia and finally put together a bold plan to revive the beleaguered Japanese economy. It disappoints.

The unexpected one-year cut in income taxes may be too little ($300 a year for a family of four) and too late (it won’t take effect until February) to spur enough consumer spending to spark an economic recovery. The Japanese have been sitting on their wallets since the government, looking at its budget deficit, raised the national sales tax in April despite a slow economy.

The proposed new tax cut is part of a larger plan to revive the economy by stabilizing the banking system and slicing corporate taxes to their lowest level since World War II. Tokyo intends to raise $77 billion to protect depositors and to prevent the collapse of key banks. Healthy banks may be expected to subsidize the takeover of troubled institutions.

That still leaves open a key question. Will the government continue to prop up and protect insolvent banks in the hope that a sustained rise in stock values will in effect wipe out their bad debts and put them back on their feet? Japanese banks have been carrying a total of $220 billion in bad private-sector loans since 1991, when the so-called bubble economy popped and property and other asset values plummeted.

Hashimoto, despite his talk of a series of financial reforms beginning next April, apparently will not go as far as imposing an American S&L-type; shutdown/bailout to weed out unprofitable institutions. Other Asian nations are having to resort to such measures under pressure from the International Monetary Fund. Japan has the funds necessary to clean its own house by refusing to coddle debt-laden banks and other financial institutions.

The prime minister seemed to be moving in the right direction when he allowed the demise of two banks and the 100-year-old Yamaichi Securities last month. But now he seems reluctant to make tough choices. That is no way to instill confidence in his own country, much less in the other troubled economies of Asia.