Hashimoto, in a Risky Move, Offers Tax Cuts

Bowing to a torrent of pressure from the United States, international investors and elite Japanese business leaders, Prime Minister Ryutaro Hashimoto on Thursday abandoned the austerity policies on which he had staked his political reputation but which critics say have thrown Japan into recession.

In a risky political about-face, Hashimoto announced $30 billion in temporary tax cuts designed to persuade skittish Japanese consumers to open their wallets.

Japan’s economic weakness has dried up a desperately needed export market for Southeast Asian nations and South Korea, prompting the entire region to aim its export machine at the United States.

Washington had demanded that Tokyo cut taxes to rev up the sputtering Japanese economy, the world’s second largest, fearing that Japan’s weakness could torpedo any recovery in troubled Asian nations and even harm the buoyant U.S. economy.

Hashimoto’s move opens him to fresh charges of economic mismanagement by his many political enemies, including Liberal Party leader Ichiro Ozawa, who quickly called on the prime minister to resign.

But if Hashimoto succeeds in preventing an economic swan dive, it could save his Liberal Democratic Party from a rout in elections scheduled for July.

Reaction was mixed to Hashimoto’s televised speech, in which he announced new details of a $121-billion economic stimulus package, including the tax cuts. Hashimoto pledged the direct financial impact of the package will be $76 billion, or 2% of Japan’s gross domestic product.

U.S. Ambassador Thomas S. Foley hailed the move as “very encouraging” but also pressed Japan for faster deregulation. Treasury Secretary Robert E. Rubin, a vocal critic of Japan’s decision to hold back on tax cuts, praised Hashimoto’s policy change. “We welcome Prime Minister Hashimoto’s announcement of steps to stimulate the Japanese economy,” Rubin said in a statement in Washington.

But many analysts and business figures said the tax cuts should be larger and permanent, and they warned even that might not have the desired effect.

“Is this what’s going to turn the Japanese economy to a 2% or 3% growth path? No,” said Jesper Koll, senior economist at J. P. Morgan Securities Asia Ltd. “But is there anything that can turn this economy to a 2% or 3% growth path? I also think the answer is, ‘No.’ ”

At midday today, the Nikkei stock index was down nearly 205 points, or 1.2%, to 16,332. But the index had soared 6.6% in the previous five sessions on talk of tax cuts. The yen, meanwhile, strengthened to 130 to the dollar, compared with 131 in New York on Thursday. A week ago, it took 135 yen to buy one dollar.

The Bank of Japan had sold an estimated $1 billion to $2 billion for yen in the New York currency market early Thursday, and said the U.S. Federal Reserve had helped out by doing the same on its behalf. That action drove up the yen’s value, which has fallen steeply recently against the dollar on doubts over Japan’s weak economy and the government’s failure to do much about it.

It remains to be seen if the effects of this economic package will come soon and strong enough. Of the $76 billion in real stimulus measures, only $30 billion is to come in the form of tax cuts; $46 billion is public spending that skeptics think could be frittered away mainly on pork-barrel projects.

Moreover, Hashimoto’s proposals fell short of the radical fix for which some had dared to hope. For example, the income tax cuts are good only for this year and next. And while Hashimoto said he wants to cut corporate tax rates to international levels within three years, that pledge is not new and would not necessarily slash businesses’ total tax bills.

Jiro Ushio, chairman of the Japan Assn. of Corporate Executives, said that both personal and corporate tax cuts should be immediate and permanent. “Three years is too slow,” Ushio said.

Just 18 months ago, Hashimoto stood atop a sound truck in his hometown of Okamoto and delivered a campaign speech that, in the United States, would have been his political death knell. He vowed to raise the national sales tax by 2% and put the bloated national budget on a crash diet. Convinced of the need for painful sacrifice to avoid saddling their children and grandchildren with a legacy of debt, Japanese voters then handed Hashimoto’s Liberal Democratic Party a victory in the October 1996 elections.

Hashimoto kept his word. But the tax increase, coupled with other austerity moves, sapped the strength of Japan’s feeble economy. After six years of tepid growth, the economy is believed to have shrunk in the fiscal year that ended March 31, the first decline since 1974.

Pressure from well-placed critics--including Sony Corp. Chairman Norio Ohga, President Clinton and the International Monetary Fund--left Hashimoto with little choice but to retreat. Looking tired and harried, the usually dapper Hashimoto vowed to “regain trust in our economy and our economic management, both domestically and internationally.”

Fending off unusually hostile questions from the ordinarily circumspect Japanese reporters who cover him, Hashimoto insisted that his policy reversal did not warrant his resignation to “take responsibility” for what he has now tacitly acknowledged as a major economic blunder. Instead, he suggested that if he were to fail to take the appropriate steps to stimulate the economy for fear of losing face, that might justify his ouster.

“Whether Hashimoto resigns or not is now irrelevant,” said Richard Jerram of ING Barings in Tokyo. “Hashimoto claims he will continue as prime minister, and although this might not be possible given his loss of credibility, protecting his reputation is no longer a barrier to action.”

Lacking either a strong factional base inside the LDP or the popularity he once enjoyed, Hashimoto has been struggling with the conservative wing of his own party, which has advocated dumping him and cutting taxes. Meanwhile, the dovish wing, headed by Secretary- General Koichi Kato, has adamantly opposed tax cuts lest Japan’s red ink further multiply.

Hashimoto appears to have been spared ouster only because his party has yet to find a suitable heir. “Who’s going to take the job now? Who wants the job?” asked John Neuffer, author of the Behind the Screen newsletter on Japanese politics. Those who might volunteer are widely seen as lacking the charisma to win the upper house parliamentary election in July.

Some believe that Hashimoto’s credibility will never recover from his U-turn on taxes, while others say all will be forgiven once citizens get their tax rebates. “I’ve never heard of a politician who lost votes by promising tax cuts,” noted a former U.S. diplomat.

Had he not caved in on taxes, Hashimoto could have been thrown out as early as May but now will survive “for a while,” said Takao Toshikawa, a prominent political commentator. But Hashimoto is certain to be made the scapegoat if the LDP bombs at the polls, analysts said.

* NUCLEAR DEAL AT RISK: Funding woes may halt work on N. Korea nuclear plant. A12