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Japanese Look to an Economic Support Package to Aid Market

Asia: Lawmakers propose a number of measures to calm investors and restore confidence, but others are wary.


TOKYO — Top Japanese lawmakers Friday reached into the back of their drawers and pulled out several tax break and emergency stock-support proposals designed to calm skittish stock market investors and restore faith in their leadership. In fact, the "emergency economic support package" may have done just the opposite.

"They've taken every measure they could think of, kooky or not, and just thrown it out there with this," said Craig Chudler, strategist with Nikko Salomon Smith Barney Japan. "That's the state they're reduced to."

The object of the government's confidence-building measures, the stock market, closed down 22.66 points at 12,627.90, near a 15-year low.

The government is desperate to boost share prices before March 31, the end of the Japanese fiscal year, to stave off a raft of bankruptcies and related shocks to the financial system.

The plan announced Friday includes proposals to cut capital gains tax for small investors, expand liquidity for Japan's shaky banks, accelerate write-offs of nonperforming loans and ease monetary policy.

On the face of it, these are all sound ideas, and some of them may offer long-term benefits. The problem, analysts say, is that the package was rushed through by a small group of lawmakers and its results are expected to spur infighting. As such, the measures seem designed more for appearance than for tackling Japan's many structural problems.

"They took these measures because they felt someone had to do something, but there's nothing new here," said Junji Ota, analyst with Okasan Securities. "The Japanese economic situation is hopeless."

Just hours after the plan was announced, fellow members of the ruling Liberal Democratic Party who sit on the party's tax committee condemned the plan because they were not consulted and because the proposed tax breaks come at a time when Japan's debt already is at record levels.

Even the individual measures outlined Friday seem to be less than meet the eye. The plan would cut taxes for individual investors who earn capital gains or dividends, for example, in a move designed to boost demand for stocks. But small investors make up only about 20% of the market, said Chang Yi, analyst with Sumitomo Asset Management.

Although tax cuts are welcome and could offer long-term benefits, small investors arguably don't invest for more fundamental reasons. Shareholder rights are weak, dividends tend to be very small, the outlook for Japanese corporate earnings is poor and few investors anticipate capital gains, let alone worry about capital gains taxes.

"They're just applying a bit more veneer. This package is just another stopgap," said Yoshikazu Takekoshi, a 50-year-old Tokyo salaryman. "I have no intention of buying any stocks. I can't see much hope ahead and most people I know just seem to be getting more worried."

Then there's a rather hazy plan to help financial institutions unload more of their nonperforming loans. As outlined, an intermediary institution would buy nonperforming loans from the banks. The current intermediary set up in 1998 to buy bad loans following the 1997-98 financial crisis runs out of funding at the end of this month.

But it's unclear--some say intentionally--whether this new institution would draw on government funding to purchase the bad debt from banks. If not, there's little likelihood it will provide banks with much relief or improve liquidity, but it will instead operate as something of a shell game.

If new government money is being added to the pot, the plan risks sparking a backlash since taxpayers are increasingly wary of bailing out what some see as irresponsible fat-cat bankers. The issue could become even more contentious if people feel that the plan was approved in an underhanded way.

Overriding the package is the pressing issue of Japanese political leadership, or lack thereof. Prime Minister Yoshiro Mori is, in theory, supposed to shepherd the stock-supporting measures through parliament and the bureaucracy. But the gaffe-prone prime minister has seen his popularity sink to single-digit levels and he could be forced out of office at any time.

Some measures in Friday's announcement, such as providing liquidity to the banks, need to be put in place by the end of the month, while others may not be ready for months, placing their progress in doubt as many economic policymakers find themselves distracted by the political chaos.

Japan has recently seen a parade of bad economic news. On Thursday, Finance Minister Kiichi Miyazawa spooked the currency markets by warning that the government's finances are "near a state of collapse." This sent the yen below the 120 level against the dollar, near a 20-month low.

Machinery orders fell by 11.8% in January and wholesale prices fell by 0.4%, while consumer prices declined by 1.1% in February, adding to fears of deflation. And Standard & Poor's lowered its rating on Japanese government debt last week. "The economy is in a shambles," said Chudler, the securities strategist.

Fighting among the Bank of Japan, the finance ministry and politicians also has intensified. Lawmakers said Friday that the central bank should take partial blame and move to further ease monetary policy, although interest rates are already close to zero.

The government also has frequently blamed consumers for not spending more. With Japan's huge government debt overhang, however--it's set to hit $5.6 trillion, or close to 130% of gross domestic product as of March 31--and the bleak economic outlook, consumers are hunkering down.

"I'm just worried the government will raise taxes, and my salary isn't going up," said Kiyoshi Kutsukawa, a 40-year-old office worker. "'We're just barely making ends meet."


Hisako Ueno in The Times' Tokyo bureau contributed to this report.

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