Japan’s Prime Minister Likely to Support Major Tax Cuts

Battered by fierce criticism at home and abroad, Prime Minister Ryutaro Hashimoto is expected as early as today to proclaim his support for a massive package of tax cuts--a policy reversal that he hopes to carry off without committing political suicide.

Hashimoto, who now concedes that Japan’s economy is in “quite severe” straits, is capitulating to the almost universal view that tax increases he imposed one year ago were a colossal mistake because they led to an abrupt falloff in spending by consumers.

Tax cuts combined with a spending program would flesh out a vague $120-billion plan promised last month aimed at warding off the threat of a deep downturn. Faster growth here also would benefit troubled Asian neighbors and help keep trade frictions with the United States under control by boosting Japan’s appetite for imported goods.

Without bolder government action, according to critics such as Sony Corp. Chairman Norio Ohga, economic stagnation in Japan risks triggering a global recession that could send Wall Street stocks plunging and leave foreigners pointing the finger of blame at Japan.

The Hashimoto government has proposed a series of steps intended to jump-start the economy over the last several months, all of them dismissed by economists as inadequate. In recent days, the criticism of Japan’s inaction has reached fever pitch.

The dire warnings from Ohga were followed by complaints and pleadings from Europe and the United States that Japan take effective action, a step seen as critical to pulling the rest of Asia out of financial crisis and limiting the spread to other industrialized countries.

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Just Friday, President Clinton blasted “entrenched resistance” of Japanese bureaucrats to strong economic stimulus measures, and said that the United States must be “respectful but firm in urging the Japanese to take a bold course.”

Whatever the details of the new plan, critics are sure to say it is too little too late. But nearly everyone agrees that the plan now being hammered out is better than nothing. Inclusion of major tax cuts, which had been in doubt, now appears extremely likely, political insiders and analysts say.

“Japan’s government has finally started to realize that something must be done,” said Eiji Yamamoto, a Konan University economics professor.

Hashimoto hinted at such a change Monday, when he promised parliament that he will take “bold measures” for economic revival. He has set the stage for a turnabout by acknowledging new pessimism about Japan’s straits.

“For the first time since World War II, various negative factors have come all at once and made the economic condition quite severe,” Hashimoto told parliament.

“All I can say for now is, given critical economic conditions at home and abroad, what has to be done will be done boldly,” Hashimoto declared. “I am well aware that the public and the entire international community are keeping a close eye on what will be included in the package.”

Other ruling party politicians have been even more forthright about a new willingness to boost the economy by cutting taxes. “I think tax cuts will be included in the package,” ruling Liberal Democratic Party policy chief Taku Yamasaki said.

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Initial expectations were that no more than half of the stimulus package pledged last month would consist of direct fiscal measures such as public spending and perhaps tax cuts. Ruling party politicians now are saying that such “real water,” as it is called here, will account for more than half of the package--perhaps $7 billion to $15 billion more than originally indicated.

The rest of the $120-billion figure will consist of measures such as government loan programs that have less impact on the economy because in many cases they simply replace private-sector borrowing rather than create new spending.

Hashimoto initially staked the reputation of his administration on strengthening long-term government finances to prepare for the aging of Japan’s population early in the 21st century, a course strongly advocated by Finance Ministry bureaucrats. Last year, he raised sales taxes and cut government spending in an attempt to ensure that when today’s workers retire, there will be money to pay their pensions and medical bills.

But the tax increases and spending cuts slammed the brakes on what had been lively economic growth in 1996.

No one expects Hashimoto to say that he made a mistake. He can argue, with considerable justification, that the situation has changed: Neighboring Asian economies are in crisis, Japan’s financial system has been battered by unforeseen bankruptcies, and foreign pressure has escalated beyond easy endurance.

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For reasons largely based on complex domestic politics, Hashimoto has been avoiding too much discussion of the details of the economic stimulus program until parliament gives final approval to the national budget for fiscal 1998, which began April 1. That approval is expected today, and Hashimoto aides have said he will speak out on his economic program either tonight or Thursday.

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Etsuko Kawase of The Times’ Tokyo bureau contributed to this report.