A Jump Start In Japan Just In Time

It's the good news Japan has been waiting for. After more than a year of false starts in the economy, crippling political intrigues, and stock market swoons, Prime Minister Morihiro Hosokawa finally has come through with a stimulus package of generous proportions. With a hefty tax cut for ordinary citizens and benefits galore for big business and banks, the deal, announced in early February, lays the groundwork for a consumer-led recovery.

Hosokawa wrested $135 billion from Japan's tight-fisted Finance Ministry, a good $18 billion more than most estimates (table). Unlike earlier packages, which just accelerated public spending, this deal actually puts money in consumers' pockets by mandating a $55 billion annual income tax cut, retroactive to Jan. 1. That comes to about $1,100 per household. More consumer demand means companies can restore semi-idle plants to normal production and avoid closings. And stoking spending is just what U.S. trade negotiators want, since they figure a recovering Japan is more likely to suck in imports.

WORN-OUT WARES. The risk is that consumers, still hung over from the go-go 1980s, will just dump their new money into savings accounts and so torpedo a recovery. And the Finance Ministry has forced Hosokawa to agree to a corresponding hike in the sales tax, from 3% to 7%, later on.

The betting now, though, is that consumers will come out of their shell. True, they probably won't plump down big money for luxury goods. But they need to replace worn-out appliances and consumer electronics. Already, sales of electrical appliances at such discounters as Mr. Max Corp. and Keiyo Corp. are strong. Retail analyst Yukihiro Moroe at Goldman Sachs (Japan) Corp. thinks that about half of the tax cut will get spent. As for the sales-tax hike, Hosokawa managed to defer it until April, 1997, giving consumers three years to buy until they feel the pinch.

Executives are already anticipating a lift from this spending. They figure consumers will feel more confident now that Hosokawa has enacted electoral reform and freed the government from last year's political paralysis. Nobuyuki Horiuchi, head of planning at Toshiba Corp., sees perhaps $90 million in sales to consumers this year as a direct result of the package. And as the tax cut's effect is gradually felt in the whole economy, Toshiba looks for much bigger improvements. "When the indirect effects start to show up in capital spending, that will make a big difference," says Horiuchi. Consumer-goods companies won't be the only beneficiaries. The package helps construction firms by earmarking $32 billion for public works, from bridges to sewers.

There are hurdles to clear. Banks are still absorbing bad debts accumulated from years of shaky real estate deals. So bankers might stop a fledgling recovery in its tracks by failing to lend enough when the time comes. Yet Hosokawa's package budgets some $25 billion to purchase land for public works. Additional cuts in land-transaction taxes should make real estate sales easier. These measures will likely free the banks of some of that unwanted real estate, giving them a freer hand to extend new loans.

Perhaps a more substantive worry is the strong yen. If Hosokawa doesn't force bureaucrats to agree to hard goals on trade with the U.S., Treasury Secretary Lloyd M. Bentsen may yet again talk the yen up. Then, Japanese export giants could see any domestic sales gains swallowed up by overseas losses.

NO SPOILERS. Longer term, too, it's unclear that Hosokawa can push through serious economic deregulation that would permanently benefit consumers as well as the most efficient manufacturers and retailers. Dan Harada, a lobbyist with close connections to the Liberal Democratic Party, thinks Hosokawa's popularity cuts little ice with powerful bureaucrats. "His 74% [approval rating] makes a good headline," says Harada, "but the people at the Ministry of Finance know it doesn't mean much."

Perhaps, but business can find other encouraging signs in the political upheaval: The Japan Socialist Party looks to be on its last legs. A think tank associated with the daily Nihon Keizai Shimbun recently ran a computer simulation to reenact the last election, using the just-approved electoral system with its 300 single-seat constituencies. The computer showed that the Socialists would have won only four lower-house seats, as opposed to 77 now.

That means the Socialists, who almost derailed electoral reform and who have balked at Hosokawa's attempts to rev up the economy, won't be able to play the spoiler in future parliamentary maneuverings. So the probusiness politicians in the LDP and Hosokawa's Japan New Party can give the economy prompt attention from now on. All the more reason to think a recovery is in the offing.

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