yes, we just need to fnd the bleakest point, where almost all have given up + more dereg + longer term tax cuts + hashimoto's head = buying time in japan.
Monday, April 20, 1998
Tokyo's Brave but Inadequate Tax Cuts Fail To Make Mr. Market Smile
By Peter C. Du Bois
Thursday, after the stock market had closed for the day in Tokyo, Prime Minister Ryutaro Hashimoto proposed additional, albeit temporary, tax cuts to bolster the stagnant Japanese economy. This package, which included increased government spending, saw him bravely back away from fiscal austerity.
Psychologically, big tax cuts are needed to bolster consumer confidence in Japan, which was badly shaken by tax hikes in April 1997. Alas, Hashimoto's offer probably was insufficient. However, even this small risk to his reputation as a deficit-cutter could cost him his job.
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To reward his unselfish but cautious action, the U.S. strongly endorsed, but didn't join, Japanese intervention in currency markets to strengthen the recently weakening yen. At its intraday high Thursday, $1 bought 133.59 yen. The greenback fell to 129.54 and closed at 131.20 in New York.
On Friday, with currencies thinly traded in major financial centers ahead of Easter, the Bank of Japan got better results from ongoing intervention. The yen hit 127.42 in Tokyo, then fell to about 129 late in the New York day, against 135 a week earlier.
In equity trading, Mr. Market wasn't impressed with Hashimoto's tax and other proposals. The 225-share Nikkei index of Tokyo shares, which cumulatively had risen 6.56% over the first four sessions in hopes of some bold moves, eased 0.34% Friday, closing at 16,481.12, against 15,517.78 on April 3.
All told, Hashimoto promised 10 trillion yen ($77.5 billion) of stimulus, including two trillion of personal tax cuts this year and a like sum in 1999. He also said he'd try to find a way to lower corporate tax rates to "international levels" over the next three years.
Reaction to the latest Japanese stimulus package was mixed. Richard Jerram, Tokyo-based economist for ING Barings, told clients that skepticism about this plan "is misplaced." Furthermore, "whether Hashimoto resigns or not now is irrelevant. In that avoiding the embarrassment of changing the fiscal reform bill had been seen as a barrier to tax cuts, that barrier now has been removed. Hashimoto claims he will continue as prime minister. Although this might not be possible, given his loss of credibility, protecting his reputation no longer is a barrier to action."
Elsewhere, critics complained loudly to the Japanese media. "Measures to stimulate the economy should be tax cuts and a change of prime minister," opined Motoya Okada, president of Jusco, a big supermarket chain.
Commented Yasuhiro Sato, head of Kirin Brewery: "Merely implementing a Y2 trillion temporary tax cut repeatedly is insufficient to pump-prime the economy. I want the government to implement an annual Y5 trillion tax cut as a permanent measure, as the figure would account for some 1% of the nation's gross domestic product."
Ken Okamura, a Tokyo equity strategist for Dresdner Kleinwort Benson, also remains skeptical. He notes that, "having absorbed a barrage of criticism at home and abroad, the Japanese government has moved to stimulate the economy... . This infusion of public money should help to stabilize the equity market and boost economically sensitive issues for the short run." However, "in the long run, we remain skeptical about the outlook for corporate earnings and concerned with structural problems, such as the overreliance on construction" spending.
Peter Tasker, senior Tokyo strategist at DKB, told Barron's: "My basic position on the stock market remains unchanged. Large stocks are much too expensive for a bear-market bottom, earnings will be downgraded heavily from the Pollyana-ish consensus of 2% growth in the current fiscal year, and deflation is indeed seeping back into the system. Further, Japan's fiscal mess, as recently pointed out by Moody's, precludes aggressive deficit spending."
After attempting to sketch the barest outline of a contrarian case for investing in Japanese stocks currently, Tasker turns to politics. "Hasimoto could be forced from office any week now. If that were to happen, there probably would be a palpable sense of relief all around. Whoever succeeds him would have a greater chance to push through major [structural] changes with plenty of public goodwill behind him."
In addition to cutting corporate taxes for those who pay them, Hashimoto should consider enlarging the number of taxpayers in Japan. By one account, owing to preferential practices, 63% of uncompetitive small and medium-sized businesses pay no corporate tax. One reason: Some deductions for entertainment expenses exclusively benefit small companies.
Eliminating this loophole undoubtedly would be controversial. Hashimoto, who already has done his country, not to mention Asia and the rest of the world, a favor by reversing course on fiscal austerity, has nothing to lose by trying to reform the Japanese corporate tax code.
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