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Japanese Leader Plans to Revive Flagging Economy

By Sandra Sugawara
The Washington Post

Bowing to pressure from foreign leaders, Prime Minister Ryutaro Hashimoto unveiled Thursday a plan to cut income taxes by $30 billion over the next two years, a step economists hope will stop Japan's slide into recession.

At a nationally televised news conference, a weary-looking Hashimoto said Japan's economy was in "quite a serious state" and needed new stimulus. His move reverses a long policy that Japan could not have new tax cuts, so as to keep its budget deficit under control.

Stopping a recession in Japan is emerging as a central goal in international efforts against the financial crisis that is shaking much of East Asia. If Japan can get its economy moving by giving citizens more spending money, billions of dollars of imports would be drawn in from all over the region, helping other Asian countries recover.

U.S. ambassador to Japan Thomas Foley called the stimulus package "very encouraging" and "a bold action." The U.S. has led a rising chorus of foreign clamoring for tax cuts to revive economic growth in Japan, the world's second-largest economy.

In Washington, Treasury Secretary Robert Rubin gave a more guarded response. In a statement, he said he "welcomed" the step, adding that "what is crucial is that Japan move quickly to put in place a strong program."

Hashimoto's handling of the economy has sent his popularity rating plummeting, but analysts said his performance Thursday may turn that around. "Mr. Hashimoto made his breakthrough in his political crisis," said political commentator Shigezo Hayasaka.

Hashimoto gave out few additional details about the tax and spending plan during the 30 minute news conference, and there were immediately conflicting interpretations. The Finance Ministry and Hashimoto's office said it was not yet clear how much tax cut each taxpayer would receive or when they would get the money.

But the NHK television network reported that the rebate would be similar to a $15 billion tax cut enacted last January, which will give almost $500 to a family of four this year.

Japanese news media also reported that under the new plan, taxpayers will likely get the first $15 billion of the tax cut announced today before mid-July elections for the upper house of parliament. LDP leaders in the upper house had been lobbying for a big tax cut before July to boost their re-election efforts. The other $15 billion in today's package would be distributed next year.

The tax cuts are not permanent, lasting only two years. That leaves unclear whether consumers would go out and spend the money, or save it in anticipation of tax rates rising two years from now.

Foreign economists in Tokyo predicted the cuts would be sufficient to stop Japan's economy from contracting. But they warned the plan would not lead to Japan's long-term recovery, because it did not deal with the country's basic structural problems, such as the freeing-up of industries hampered by Japan's stern regulation.

"It's enough stimulus to head off the tailspin worry, although I don't think its going to bring a vibrant Japanese economy," said Robert Alan Feldman, a Tokyo-based economist with Morgan Stanley.

"You can say it's buying time,"said Jesper Koll, chief economist at investment bank J.P. Morgan. "I think that negative growth this year is no longer in the cards." But he predicted that the economy will continue to experience volatile ups and downs rather than sustained growth, because Hashimoto's proposal lacked any outline for permanent structural reform.

Hashimoto did, however, hint at such changes, saying he was launching a review of the corporate tax system, with the view of reducing corporate taxes to international levels within three years. The effective corporate tax rate of the largest corporations in Japan is 46.37 percent, compared to 41 percent in the U.S.

In recent weeks, Japan has been hit by a long list of grim economic data. Economists have been warning that Japan was falling into recession, and criticized Hashimoto for being slow to act. But in order to do the additional $30 billion in tax cuts, parliament must amend Japan's fiscal restraint law, the centerpiece of Hashimoto's economic policy to reduce the nation's deficit. Some critics had asserted that if Hashimoto switched positions on fiscal policy, he should resign.