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Hashimoto Announces Tax Cut, Spending Plan to Bolster Economy
An INTERACTIVE JOURNAL News Roundup
Prime Minister Ryutaro Hashimoto said Thursday that the government plans to implement tax cuts exceeding 4 trillion yen ($30.46 billion) to help the country's ailing economy.
Mr. Hashimoto told a news conference that the government will take adequate fiscal steps to stimulate the economy, including two trillion yen of special income-tax reductions this year, and a two trillion yen cut next year as well. The amounts were more than many analysts had expected, but the effort still failed to please jaded financial markets. U.S. Treasury Secretary Robert Rubin came out strongly in favor of the plan, and offered U.S. support as Japanese authorities intervened in U.S. foreign exchange markets to prop up the sagging yen. The dollar dropped sharply in response. "We share the concern expressed by the Japanese prime minister about recent weakness in the yen, and in that context we welcome the action undertaken by Japanese authorities in the exchange market to support the value of the yen," Mr. Rubin said in a statement.
Mr. Hashimoto also released some of those specifics of an economic-stimulus package that will be worth more than 16 trillion yen, 10 trillion yen of which would take the form of "real" spending. The 10 trillion yen in "real" spending, the largest amount ever in Japan,includes public-works spending and tax cuts but excludes land purchases by the national and local governments.
His decision follows parliament's approval on Wednesday of the budget for the fiscal year that began in April.
Analysts and market participants welcomed Mr. Hashimoto's politically risky move away from one of his administration's key policies: restraining spending to cut the budget deficit. But they said the package isn't enough to fix the main problem undermining growth: weak consumption. One major deficiency of the stimulus plan, the analysts said, is that the income-tax cuts won't be permanent.
Japan's personal consumption as a proportion of disposable income wallowed at record-low levels in January and February, even though a two trillion yen special income-tax cut was implemented in February. Most of the windfalls from the fresh temporary tax cuts are likely to be saved, as concern about the economic outlook keeps a lid on spending, economists said.
"The core problem for the Japanese economy is sluggish consumer sentiment. To shore up that sentiment, a permanent income tax cut is necessary," said Kazuaki Harada, chief economist at Sanwa Research Institute. The dollar plunged to 129.96 yen in late morning trading as the Bank of Japan bought yen in New York. But before the announcement, the dollarh had climbed as high as 133.59 as traders quickly discounted the long-term impact of the package. "We had been hoping for something like a permanent tax cut, and when that wasn't announced, the market started short-covering. To put it bluntly, we're disappointed," said Takeo Suzuki, assistant manager of foreign exchange at Yasuda Trust & Banking.
Japanese stocks, weak for most of the day, rose late in the session after news of the stimulus plan was leaked by the Nihon Keizai Shimbun. The Nikkei 225 stock index ended 160.04 points higher at 16536.66, marking the fourth straight day of gains.
In addition, Mr. Hashimoto said the government will begin to discuss fiscal reform so that parliament can end its debate about reforming the law by April 20. But he damped hopes for further, more aggressive stimulus moves in the future by saying that although the government will be more flexible about issuing deficit financing bonds -- which the law seeks to phase out -- Japan isn't abandoning its long-term goal of reducing the budget deficit. While Japan needs to promote structural economic and fiscal reforms, the government recognizes that it should also take necessary "emergency steps" to revitalize the ailing economy, the prime minister said. Mr. Hashimoto didn't elaborate on such policy measures as corporate-tax cuts or the content of public-works spending. But he noted that the next economic package should include measures to build up information and communications infrastructure, help liquidate bad loans and prepare for an aging society.
He also said he would like to lower Japan's corporate tax rate to "international levels" over the next three years. The government reduced the effective corporate tax rate to 46.35% this month from nearly 50% previously, and officials have said a rate of 40% would put Japan in line with other leading industrialized nations.
Japan is likely to get mixed reviews when financial officials from the Group of Seven leading industrialized nations gather in Washington next week, said Russell Jones, chief economist at Lehman Brothers in Tokyo. "They'll probably say 'it's more than we thought, but still not enough,'" he said. U.S. Ambassador to Japan Thomas Foley said Japan's economic fundamentals are "still enormously strong," and that the U.S. is hopeful the Japanese government's stimulus package will boost domestic demand. Asked if he would resign for reversing course on fiscal reform, the primeminister said he would not step down. "If I hadn't taken the necessary emergency measures [to help the economy], then I would have had to take political responsibility," he said. |
