Conventional wisdom holds that substantial, permanent cuts in Japan's high and steeply progressive personal income tax rates are one of the policy fixes Tokyo must make, both to pull the nation out of its current economic morass and to construct one part of the macroeconomic framework for sustained growth. Economists generally concur that the pair of tax rebates to be implemented in 1998 and the one scheduled for 1999 will not deliver the required boost to consumer spending, the source of three-fifths of Japan's economic activity. With people feeling increasingly uncertain about their financial futures in the near term as well as over the long run, they are more likely to save than spend the money from the temporary tax cuts.
Building a political consensus for permanent tax cuts, let alone tax reform, is not easy under the best of circumstances in Japan, much less when the country is running a huge budget deficit. Narrowing that gap is the powerful Ministry of Finance's priority. Consequently, it is opposed or at least strongly resistant to any change in the tax code that is likely to lower revenues in the short term.
Revenue-neutral tax reform is technically possible. Intermediate and top marginal tax rates could be trimmed without revenue losses if the currently high minimum taxable income level were reduced and the effective tax base expanded. The trade-offs, however, have the very real potential to backfire on the governing Liberal Democratic Party at the polls. That political reality makes it likely that the government will only tinker with the personal income tax system rather than overhaul it.
YEN JUMPS AFTER JOINT INTERVENTION by Douglas Ostrom
Washington has done it again. Almost alone among the world's top industrial nations in repeatedly expressing its distaste for government efforts to stabilize currency values, every so often the United States nonetheless gives a demonstration of how to move currency markets at least temporarily. The intervention by the Reagan administration following the September 1985 Plaza Accord was a particularly striking example. It boosted the yen dramatically after years of weakness against the dollar in the context of statements from Washington that, if anything, it welcomed a strong dollar.
POLITICAL, SYSTEMIC FACTORS LIMIT HASHIMOTO'S ACTION ON ECONOMIC REFORM by Barbara Wanner
Prime Minister Ryutaro Hashimoto, lambasted both at home and abroad for economic mismanagement, surprised some international observers June 22 by announcing through Liberal Democratic Party Secretary General Koichi Kato that his government would unveil by July 8 a blueprint to reduce the nation's huge overhang of nonperforming bank loans. Most experts had anticipated that Mr. Hashimoto would wait until after the July 12 upper house elections before proposing a cleanup of the banking mess, which may result in the shuttering of weak financial institutions, greater unemployment and other unpleasant domestic repercussions.
G-7, ASIA WELCOME US.-JAPAN INTERVENTION, URGE TOKYO TO ACT by Eric Altbach
While the June 17 U.S.-Japan intervention in the yen-dollar market temporarily halted a yen sell-off that had threatened to trigger a second wave of financial turmoil in Asia, Japan's actions remain under intense scrutiny. Its Asian neighbors, whose currencies and stock markets also came under attack as the yen quickly weakened after mid-May, are still fearful that Japan may prove to be a continuing threat to regional economic recovery. Responding to these concerns, Japanese officials hastily called a meeting in Tokyo June 20 to discuss the ongoing Asian crisis, inviting deputy finance ministers from the Group of Seven industrialized countries and from the 10 members of the Manila Framework group, which was formed last November to respond to the onset of a new bout of financial instability in Asia.
DIET VOTE KICKS OFF LATEST FISCAL STIMULUS PLAN by Jon Choy
Against a background of negative economic developments, the Diet approved June 17 the government's supplemental budget for the current fiscal year. Prime Minister Ryutaro Hashimoto and senior officials of the ruling Liberal Democratic Party expect the ¥4.6 trillion ($38.3 billion at ¥120=$1.00) spending and tax authorization bill to reverse the economy's downward spiral by the end of this summer. By then, the additional outlays and tax cuts will have been added to the impact of front-loading public works funds previously authorized in the initial FY 1998 general account budget. Although the recently approved spending bill sets a new record for supplemental budgets, critics say that it still falls far short of delivering the ¥16.7 trillion ($139.2 billion) worth of fiscal stimulus that Mr. Hashimoto and the LDP promised in April (see JEI Report No. 17B, May 1, 1998).