Prime Minister Junichiro Koizumi on Tuesday ordered his key policy-setting panel to draw up a draft bill featuring tax cuts worth more than 1 trillion yen and future tax hikes aimed at offsetting revenue shortfalls.

Koizumi issued the order at a meeting of the Council on Economic and Fiscal Policy, according to Heizo Takenaka, state minister in charge of economic and fiscal policy.

The 11-member panel, which Koizumi chairs, includes economics ministers and members of the private sector.

"I want to promote specific reforms of the tax system, including implementing tax cuts worth more than 1 trillion yen, while maintaining fiscal discipline by achieving tax revenue neutrality not on a single-year basis but a multiyear basis," Takenaka quoted Koizumi as saying.

Legislation for the tax cuts is expected to be submitted to the Diet during the next ordinary session, which is scheduled to start in January, government officials said.

Koizumi first floated the idea of slashing tax burdens by that amount in late July, but at the time did not mention specific steps to make that possible.

With Tuesday's directive, the focus shifts to the actual size of the tax reduction, which taxes will be cut, and the time span for the cuts and future tax hikes to fund them.

Asked by reporters how much over the 1 trillion yen mark he has in mind for the tax reduction, the premier only said, "That is up to later discussions."

Asked if he has any plan for the time span for achieving tax neutrality, Koizumi said, "That will also be discussed by people in the context of tax reforms."

Ways to fund the tax cuts in particular could be a point of contention between members of the council, the government's top economic policy-setting panel, and the Finance Ministry.

Members of the key economic panel say that a natural revenue increase resulting from a future economic recovery should be taken into account. That idea is opposed the Finance Ministry, which says such a rise in revenue is far from secure.

Extra budget entreaty

Japan will have to compile a supplementary budget for fiscal 2002 to shore up its weak economy if the U.S. economic situation worsens, the ruling Liberal Democratic Party's top policy expert said Tuesday.

"We will not be able to counter (the anemic state of the economy) unless we compile a supplementary budget . . . in the event the U.S. economy deteriorates further," said Taro Aso, chairman of the LDP Policy Research Council.

Aso was apparently referring to the possibility that Washington may pressure Japan into boosting domestic demand, given Japanese exporters' heavy reliance on American consumers. The U.S. is the largest market for Japanese exports such as automobiles and electronics.

"I expect (Japanese) small and midsize companies and very small businesses will face more pressure down the road," Aso said.

Asked about the recent changes in Prime Minister Junichiro Koizumi's stance on the economy, Aso said, "He appears to have realized that things are not as simple as just implementing structural reforms to revive the economy, and that structural reforms alone would be ineffective.

"I have the impression he is changing his ideas on various aspects."