By Paul Blustein and Clay Chandler
Washington Post Staff Writers
Wednesday, December 17, 1997; Page A01

Japanese Prime Minister Ryutaro Hashimoto today announced a surprise tax cut to jump-start the nation's stalled economy, sending the Tokyo stock market and the yen soaring as investors applauded the government's new-found willingness to break with conservative fiscal policies and help lift the battered economies of the entire Asian region.

At a news conference following a hastily-convened meeting with top members of his cabinet and leaders of Japan's ruling Liberal Democratic Party, Hashimoto said that his proposal for a one-time, $15.7 billion tax cut was motivated by concerns about Japan's economic stagnation afflicting its Asian neighbors and economies elsewhere.

"I have said both domestically and abroad that we can't trigger a worldwide depression beginning in Japan," Hashimoto said. "So we decided that a bold policy needed to be considered."

The move marked a major shift away from the budgetary austerity that has been a hallmark of Hashimoto's premiership. A former finance minister, Hashimoto has hewed closely to the strong beliefs of the powerful finance ministry that Japan must keep its budget deficits as low as possible.

The Clinton administration has repeatedly pressed Japan to adopt more stimulative policies, and last night President Clinton phoned Hashimoto to say that he welcomed the Japanese policy steps as "very constructive, especially in light of recent developments in Asia," a White House spokeswoman said. The administration theory is that Japan, by far the largest economy in Asia, should serve as a "locomotive" for the region by spurring growth and thereby increasing demand for its neighbors' products.

Investors reacted enthusiastically. Tokyo's Nikkei 225-stock index lept more than 5 percent in early trading, before giving up some gains to end the trading day up 3.48 percent. The yen, which had been trading at about 131 yen to the dollar on Tuesday, strengthened to 125 yen to the dollar by midday before retreating to about 127 yen.

Jesper Koll, chief economist at J.P. Morgan in Tokyo, hailed the announcement as "clear evidence" that Hashimoto -- whose popularity ratings over the past several months have followed the tanking economy -- remains firmly in control of the LDP and is capable of decisive action when it's necessary. "This was masterfully executed, and it shows that Hashimoto is very much in charge," Koll said.

For days, media reports outlining the broad contours of the economic support plan under deliberation by LDP had suggested that party leaders favored a much more conservative set of tax measures aimed at lowering rates for landowners and corporations. Indeed, some newspapers reported this morning that the LDP had decided to put off cutting income taxes until the end of 1998.

Instead, the proposal urged by Hashimoto would enable Japanese taxpayers to claim a rebate worth an average of about 38,000 yen, or about $304 per taxpayer, against their income tax liabilities for 1997. That could put money in the pockets of Japanese consumers as early as next spring. Hashimoto wants his proposal to be taken up by the Japanese legislature next month, before consideration of tax and spending proposals for the next fiscal year.

Economists said the measure, if it wins approval, could boost the growth rate of Japan's anemic economy by as much as a quarter of a percentage point in 1998. Many private economists scoffed when the government's Economic Planning Agency recently forecast a growth rate of 1 percent for the fiscal year beginning in April. Now, however, many think that target is within range.

But some said the tax cut would be too small to ensure recovery. "This is a step in the right direction, but in terms of the economic impact, it's rather modest -- about 0.6 percent of annual household income," said Brian Rose, senior economist at SBC Warburg Japan. "We will still have trouble in Asia, trouble in Japan, and this tax cut isn't going to work any miracles."

The tax cut came the day after the LDP reached broad agreement on a plan to provide $77 billion in public funding to strengthen Japan's beleaguered banking system. That plan was derided by several analysts as timid and poorly crafted.

Still, the Japanese tax cut, and the positive market reaction, bolstered an already-growing perception in Washington that the economic crisis in Asia, while still serious, is starting to ease.

Yesterday afternoon, Clinton and officials of the International Monetary Fund -- relieved by a recovery in South Korea's financial markets -- praised steps Seoul has taken to revamp its economy, and they voiced confidence that IMF-dictated policies are starting to reverse Asia's economic slide.

At a news conference, Clinton hailed South Korean moves that have brought the nation's economy back from the brink of collapse, including allowing interest rates to rise and the Korean currency, the won, to trade freely. The won, which was plunging last week, soared 9 percent yesterday on top of a 10 percent rise Monday, and the nation's stock market also rebounded smartly, rising by nearly 5 percent yesterday.

"I'm very encouraged by the steps they are taking to try to implement the IMF plan," Clinton said. He added that on the eve of Korea's presidential election tomorrow "I think it is terribly important" that President Kim Young Sam obtained pledges from the three main candidates to support the economic restructuring program.

Clinton's remarks, and similar comments by Treasury Secretary Robert E. Rubin and IMF officials yesterday, combined a sort of cheerleading with a gentle rebuff to pleas from Asian officials for more concerted international efforts and more money to save their economies. Although officials stressed that the outlook for Korea remains fragile, the consistent message from Clinton, Rubin and the IMF in separate meetings with reporters was that the $100 billion in international rescues for Thailand, Indonesia and Korea are starting to work -- and will eventually succeed if the governments involved take the steps the IMF recommended.

In recent days, Southeast Asian leaders and Korean officials have publicly implored the world's economic powers to take a more aggressive approach to stemming the flight of capital that has wreaked havoc on their economies.

The summit of the nine-member Association of Southeast Asian Nations issued a cry for help Monday, warning that despite the IMF-led bailouts, the region's currencies are plumbing record depths, adding enormously to the debt burden of companies that borrowed dollars from abroad in recent years. The Korean government has repeatedly asked the United States and Japan to provide their portion of Seoul's $57 billion rescue funds early to ensure that the nation doesn't run out of the foreign currencies it needs to make debt payments to foreign creditors.

But yesterday, the mantra from the administration and the IMF was that the rescues are starting to generate positive effects.

Blustein reported from Washington; Chandler reported from Tokyo.