Staff writer

As the government and the ruling Liberal Democratic Party prepare their next set of economic stimulus steps, much of the focus is on the methods and extent to which fiscal pump-priming will be utilized.

A comprehensive stimulus package of at least 10 trillion yen is expected to be drawn up after the fiscal 1998 budget is enacted by the Diet, with a general outline of steps to be unveiled by the LDP as early as this week. But the LDP agreed Monday to exclude mention of any large-scale income tax cuts for the time being.

Many senior LDP leaders have said income tax cuts have less of a pump-priming effect on the economy than additional public-works spending and many think tanks' calculations support this. Nevertheless, most analysts agree that with the economy expected to shrink this fiscal year for the first time in almost a quarter of a century, various means need to be utilized to resuscitate the economy.

Much of the argument regarding the stimulus rotates around the use of additional public-works spending and a further reduction in income taxes to boost domestic demand and thus help slow the rise in the nation's external surplus and absorb more imports from embattled Asian economies.

Prime Minister Ryutaro Hashimoto has repeatedly promised to be flexible on economic policy but at the same time has stressed that he has not abandoned his push to reduce the nation's huge fiscal deficit in line with the Fiscal Structural Reform Law enacted last year.

The law requires the fiscal deficit to be slashed to no more than 3 percent of gross domestic product and the termination of deficit-covering bond issues by fiscal 2003. The government must also keep reducing annual issues of deficit-covering bonds during this time.

As Hashimoto's Cabinet focused on getting the fiscal 1998 budget through the Lower House, the United States became increasingly specific about what the upcoming pump-priming package should contain as it seeks to curb growth in Japan's external surplus and have it import more from Asia.

Over the weekend, some LDP officials began to voice support for the continuation of the 2 trillion yen cut in income and resident taxes carried out for the current year, saying that tax reductions of that scale could be implemented without revising the law.

But others in the LDP, still concerned about the possible political repercussions of backpedaling on fiscal reform, instead suggest that greater weight be placed on public-works spending, which could be funded through construction bonds and thereby fall outside the austerity law.

According to calculations by the Economic Planning Agency's Economic Research Institute, a rise in public-works spending of 1 percent of real GDP would lead to a 1.24 percent rise in real GDP over the first year. The institute also says an income tax reduction worth 1 percent of the nominal GDP would have an effect of boosting real GDP by 0.42 percent during the first year of implementation.

Meanwhile, the Fuji Research Institute recently estimated that an additional 1 trillion yen in public-works spending would lead to a 806 billion yen rise in GDP, while 1 trillion yen worth of income tax cuts would only raise GDP by 275 billion yen. These figures seem to indicate that additional public-works spending is more likely to push up the economy than income tax cuts, something which top LDP leaders such as policy affairs chief Taku Yamasaki have so far pointed out.

According to calculations by the Daiwa Research Institute, if taxation on income was slashed by 5 trillion yen, the GDP would be boosted by 0.8 percent over three years, although it would mean the nation's fiscal restructuring targets would be met by fiscal 2005 rather than the current timetable of fiscal 2003. But, the institute points out, the original target year for slashing the fiscal deficit in a draft proposal for the law was fiscal 2005 and furthermore, the law failed to incorporate the negative impact of the turmoil in Asian markets and financial sector instability in the latter half of last year.

Kazutaka Kirishima, senior economist at the Sumitomo Life Research Institute, said the argument by some, including LDP Secretary General Koichi Kato, that tax reductions would be ineffective because the money would go to savings is not necessarily true.

Economists at other think tanks say the government needs to map out a broader picture of reform, such as overhauling the health care system, so that the public gets a better idea of where their tax money and savings might go in the future before they can be coaxed to spend.