Fears that the world's second-largest economy was heading for its first recession in 24 years were lessened Thursday after Japanese Prime Minister Ryutaro Hashimoto announced plans for a $30 billion tax cut over the next two years.
He also said $51 billion would be spent to boost domestic demand, although the entire economic-stimulus package failed to impress markets, which were expecting a permanent tax cut.
Some doomsayers have warned that without a drastic policy shift, Japan risks a 1930s-style Great Depression that would ricochet across world financial markets. Economists say Mr. Hashimoto's proposals reduce the risk of a downward economic spiral.
"It puts a floor under both the economy and the markets and that's a real contribution, because a drastic tailspin is something people were worried about," says Robert Feldman, chief economist for Japan at Morgan Stanley.
Analysts say Hashimoto had again misdiagnosed Japan's principle economic ailment: weak consumption. Last year, Japan passed a one-time income tax cut of $15 billion. Experts say consumers would save the money rather than spend more. "He made the same mistake again," says Shigenori Okazaki, an analyst at SBC Warburg.
Nonetheless, the tax cuts would mark a departure from Hashimoto's fiscal austerity policy, aimed at reducing Japan's mammoth national debt, currently roughly equal to the country's gross domestic product.
One of the pillars of Hashimoto's agenda has been to put the country's finances in order by early in the next century. Thursday's move means he will have to abandon those plans, at least for now.
Doubts on the effectiveness of temporary tax cuts mean Hashimoto is likely to face pressure from trade partners when he attends a summit of the Group of Seven (G7) leading industrial nations in Birmingham, England, in May.
Washington has been openly pressing Tokyo to help the rest of Asia escape from economic turmoil by boosting its economy with tax cuts and other steps.
"I think it's a very good package, but it's not good enough and it won't completely remove ... pressure for Japan to do more later in the year," says Gerard Lyons, chief economist at DKB International in London.
The prime minister is also certain to come under fire from opposition politicians for delaying his turnaround on a policy that had until lately put fiscal rectitude ahead of stimulus. Some analysts speculate Hashimoto would be safe at least until after an election for parliament's Upper House in July.