Staff writer

Economists and academics expressed surprise Wednesday at the timing of Prime Minister Ryutaro Hashimoto's announcement of 2 trillion yen in special income and resident tax cuts, but many were doubtful actual stimulative effects would take place.

The tax reductions are planned as a one-time only move in the fiscal 1997 supplementary budget to help boost public confidence in the economy and spur spending.

Peter Morgan, senior economist at HSBC-James Capel, Japan, said he was caught off guard because he didn't expect the government to make such a move until early next year. "The tax cuts will help somewhat, but I'm concerned that they are already being advertised as a one-off" ahead of fiscal 1998, when the austerity steps written into the Fiscal Structure Reform Law begin to take effect, he said. "That suggests to the public that (the move) is the 'last goody,' and people might save it instead of spend it, and the net impact on the economy would not be that large," he said.

The tax cuts Wednesday are meant to reinforce other stimulus measures the ruling Liberal Democratic Party crafted earlier in the week. These include 750 billion yen in tax reductions through wide-ranging tax reforms, and a de-facto pledge to infuse up to 10 trillion yen into the Deposit Insurance Corp. to reduce concerns over the stability of the financial sector.

Hiromitsu Ishi, professor of economics at Hitotsubashi University, supports the steps to boost confidence in the banking sector because that is the most pressing concern. However, he agreed with Morgan in questioning whether the cuts will substantially impact the economy. "Just giving people a lump sum to spend won't have such a big effect," said Ishi, who is also a member of the government's Tax Commission. "Even now, people do have money, only they would rather save it to prepare for future burdens" such as a rise in health care costs.

But Takashi Kiuchi, chief economist at the Long-Term Credit Bank of Japan, said the market's recent lack of confidence was due to skepticism about whether the government was truly prepared to take decisive action to support its economy. Hashimoto's action, he said, was a strong message that Japan takes economic management seriously.

"This psychological effect has a much greater impact on markets than the actual size of the tax cuts," Kiuchi said.

Ishi said there is no denying that, amid all the confusion, the government is shifting its basic stance on fiscal reconsolidation, after being given the green light on additional deficit-covering bonds. If Hashimoto had indeed been serious about forging on with fiscal belt-tightening, he would have financed the 2 trillion yen tax cut by cutting back in other areas, such as special outlays for agriculture or other sources of revenue, such as tax earmarked for road construction, the scholar pointed out.

HSBC-James Capel's Morgan agreed, saying that fiscal reconsolidation efforts have "failed miserably." Morgan added that even if the economy recovers somewhat, the government will have to go about the fiscal reform more slowly because the pace outlined in the law is too fast for the economy to handle.