Japan’s Stocks Fall as Pessimism Rises

Deepening economic gloom drove Tokyo stocks to their lowest level in two years Monday as pressure mounted on the government to launch a fresh package of stimulative measures--possibly including tax cuts--to boost the lackluster economy.

But Prime Minister Ryutaro Hashimoto, who has staked the reputation of his administration on strengthening Japan’s long-term government finances through spending cuts and tax increases, reiterated in Parliament his determination to place top priority on his fiscal austerity program.

Hashimoto ruled out any cut in personal income taxes, which were boosted earlier this year when the economy was growing at a solid pace. That income tax hike, combined with an April 1 sales tax increase to 5% from 3%, triggered a new economic downturn that saw gross domestic product contract by 2.9% in the April-June quarter compared with the previous quarter.

Meanwhile, economic turmoil in other parts of Asia has worsened the outlook for Japan, and investor pessimism drove the widely watched 225-stock Nikkei index down 172.22 points, about 1%, to close Monday at 17,204.70, the lowest point since August 1995.

Hashimoto did not directly address the issue of a possible corporate tax cut, which analysts say is more likely than an income tax cut. The government is working out a package of other economic stimulus measures centered on fresh deregulation steps, including changes to encourage more efficient use of land.

“We don’t have any major source of funds, and deficit-financing bonds must never be issued for tax-reduction purposes,” Hashimoto declared.

Washington has been pressing Tokyo hard to promote measures to boost domestic demand. That would be expected to draw in more U.S. and other foreign products and thereby reduce Japan’s huge trade surpluses.

The Finance Ministry announced Monday that Japan’s global surplus in its current account, the broadest measure of trade in goods and services, soared 77.7% in August from the same month of last year, to $6.8 billion. That marked its fifth consecutive monthly year-on-year expansion.

But traders said that rise was smaller than expected, and that set off a rebound in the dollar. The dollar had weakened against the yen late last week because of fears that Japan’s rising trade surplus could lead to friction with the United States.

Japan’s huge trade surpluses are fueled in part by a weak yen, which makes Japanese goods more competitive overseas and foreign goods more expensive in Japan. The dollar traded late Monday in Tokyo at 120.80 yen to the dollar, 51% up from the dollar’s post-World War II low of 79.75 yen marked in April 1995.

Many traders expect the United States would try to correct a ballooning surplus in Japan by driving the dollar lower. A weaker dollar makes Japanese products more expensive abroad while making U.S. products cheaper in Japan.

Vice Finance Minister Takeshi Komura on Monday said he doesn’t expect Japan’s trade surplus to continue growing rapidly for very long.

Government officials have repeatedly stressed that the trend is just a temporary reaction to the April 1 tax increases and the resulting weakness in the domestic economy. They argue that Hashimoto’s overall efforts at deregulation will encourage domestic demand-led growth as urged by the United States.

But in what could be a budding rebellion against Hashimoto’s firm fiscal-tightening stance, there are growing demands within his ruling Liberal Democratic Party (LDP) for the government to take more active steps to boost the economy.

Hiromu Nonaka, a high LDP official, told a meeting of senior party leaders that boosting the economy should take precedence over fiscal reform, the Kyodo News Agency reported Monday, quoting unnamed party officials.

Other key government officials in recent weeks have moved away from previously optimistic assessments of the economy’s strength. These include Bank of Japan Governor Yasuo Matsushita, who has made increasingly pessimistic comments. This shift in official opinion could set the stage for more dramatic but still-undecided measures such as a corporate tax cut, analysts say.

Koji Omi, director general of the Economic Planning Agency, acknowledged in Parliament on Monday that it will be difficult for Japan to achieve the government’s official target of 1.9% economic growth in the fiscal year ending March 31. Most private analysts have already reduced their growth predictions to less than 1% for the current fiscal year.

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Nikkei Tumbles

Japanese stocks fell to a two-year low amid pessimism about the economy. Monthly closes and latest for the benchmark Nikkei index:

Monday: 17,204.70