Hashimoto's tax cuts will not get the stagnant economy moving unless consumers put aside their fears and splurge a little. Don't count on it.

By DONALD MACINTYRE /TOKYO

ince last December, Japanese Prime Minister Ryutaro Hashimoto's message has been: Read my lips, no new tax cuts. So when he went on television last Thursday to announce a proposal for an additional $30 billion worth of special tax breaks, it was a stunning, and embarrassing, change of course. With Japan's economy flat and perhaps even contracting, the country's trading partners have been urging bolder action for months. But the Prime Minister has resisted, afraid he'll be punished in elections this July for breaking a previous pledge to rein in Japan's mammoth budget deficit.

Now Hashimoto is gambling that Japan's consumers can spend the economy back from the brink of recession. But his belated attempt at a quick fix may not be enough to induce the Japanese to open up their pocketbooks. It's certainly not enough to influence Osaka housewife Eriko Tsutsui, 46, who's putting aside money in case her husband loses his job at an advertising company. "The government's making up policy as it goes along. There's no move to address the fundamental problems," she says. "Until that happens, you have to save and protect yourselves."

Such sentiments are widespread in Japan these days, and they show why reviving the faltering economy isn't going be as simple as cutting taxes again. As Americans enjoy boom times and soaring stock prices, Japanese are gloomier than they've been in decades. The certainties of the postwar period--lifetime jobs, rising living standards, assurance of a comfortable retirement--have suddenly disappeared, replaced by soaring bankruptcies, stagnant wages and a shaky pension system. The unemployment rate (3.6%) is at a postwar high and rising. What's worse, after churning out more than half-a-trillion dollars worth of spending packages to snap the economy out of its almost decade-long slump, the government seems to be short on ideas, and leadership. Worried that their Titanic economy has hit an iceberg, Japanese are just trying to stay afloat. As a result, consumption is weaker than it's been since 1970, when the government starting keeping records. That's making things worse, says Andrew Shipley, an economist at Schroders Japan: "We are seeing a modern economy unravel because demand is collapsing."

Thinking about what happens if the world's second-largest economy comes apart at the seams is keeping the rest of the world awake at night. The worst-case scenarios--and many are being discussed in Tokyo--range from uncontrolled deflation to hyperinflation. Those nightmares looked less likely after Hashimoto announced the tax breaks, which will be spread over two years. Yet it's far from clear that lowering taxes will jump start consumption, particularly if the government doesn't follow up with broader moves to rebuild the economy. The most likely outcome? Japan just keeps muddling through. That hurts Asian countries that need a strong Japan to help revive their economies. It will also trim growth in the U.S. and other countries.

Trying to dispel the gloom, Hashimoto slammed unnamed pessimists who say Japan's economy is in the tank. "Japan's economy is one of the strongest in the world," he emphasized, adding that things will get better if everybody pulls together. If consumers buy his upbeat message, they may go out and spend their tax windfall, stimulating growth and creating more tax revenue in the long run. Lately, however, Japanese haven't been in a spending mood. Sales have slumped at department stores and supermarkets: bean sprouts, about the cheapest vegetable on the shelves, are suddenly popular. Auto showrooms are almost deserted. People are holding onto big-ticket items such as cars and air conditioners longer, instead of rushing out to buy new models. And in a nation where food is an obsession, ordinary Japanese aren't eating out as much. Meanwhile, the household savings rate, which has crept up during the 1990s, is now 13.8% of income. (It's 4.4% percent in the U.S.).

It's not hard to see why Japanese would rather save than spend. Wages are flat, so most Japanese aren't getting richer. In fact, lots are getting poorer because land prices in big cities have fallen by half since 1990, leaving many homeowners paying off homes they could only sell at a loss. Bankruptcies are at record levels, and unemployment is rising--good reasons to keep extra money on hand in a country where the safety net for the jobless isn't very robust. Even big companies like Yamaichi Securities have gone under, something that was almost unheard of as recently as two years ago. The other big worry is retirement: Japan's public pension program is badly underfunded and everybody knows it. "Japanese consumers are being rational," says Peter Tasker, a strategist at the Dresdner Kleinwort Benson (Asia) and author of a book on Japan. "There is no button you can just press to make things great again, no magic bullet."

Japanese also know the government can't keep on throwing money at these problems, or the economy. After Italy, Japan already has the biggest fiscal deficit among major industrialized countries, more than 100% of its gross domestic product. That's why Hashimoto pledged to make cutting the deficit his first priority after coming to power in 1996. In a move widely blamed for smothering consumption, he even raised the sales tax last year. He started to backtrack last December, agreeing to a small cut in income taxes. But as the economy continued to swoon, it became clear Hashimoto would have to reverse course, using a fat tax cut to give some oomph to a recently announced package of public-works spending. Yet to make tax cuts work, he will need to do more to convince a skeptical populace that the government has a real game plan.

So far, the message isn't getting through to places like Sakai, a small town two hours north of Tokyo, where Yukio Suzuki manages two shoe stores. Sales are down 30% at Suzuki's shop in the town's new mall. At his second store just off Sakai's main street, things are worse, and several nearby shops are boarded up. Business has been bad for most of the '90s, Suzuki says, but the situation deteriorated recently after several local companies went bust, including a big concrete maker in a neighboring community. "People fear for their future," Suzuki says. "The immediate fear is that their company could go bankrupt. The distant fear is their lives after retirement."

Even Hashimoto conceded he isn't sure what Japan's shell-shocked consumers will do next. His government is so worried Japanese will just bank the money that it's launched an unprecedented campaign to encourage people to go out and buy stuff. The Prime Minister's office is running ads in movie theaters and on TV to publicize the tax cuts. And the Finance Ministry has plastered 22,000 posters on subways and trains around the nation urging everybody to go have a good time with the money. The posters feature the comic-strip character Atsuko and her family rejoicing. "Wow, special tax cuts," says Atsuko. "What should I spend the money on?"

It's quite an about-face for a government that's pushed its citizens to save since the 19th century. Thrift has long been seen as a virtue in Japan. Every Japanese pre-schooler knows the Aesop fable of the hardworking ants and the lazy grasshopper. In one version popular here, the ants slam the door on the grasshopper and leave it outside in the snow to fend for itself. Moreover, the government has deliberately trained people to save. The Central Council for Savings Information runs ads and organizes school classes on the virtues of savings. It's also active on National Savings Day, October 17. That date was chosen because it's when priests give thanks to the gods for a bountiful rice harvest. Working with women's groups, the council also distributes so-called housekeeping account books, which housewives can use to track their savings and expenses on a daily basis.

While popularity of the ledgers peaked in the early 1970s, a quarter of housewives still use them regularly, according to Sheldon Garon, a professor of modern Japanese history at Princeton University and author of Molding Japanese Minds: The State in Everyday Life. The savings council has taken its message into cyberspace as well: housewives can now download the accounting software from its Website. The government isn't as heavy-handed about pushing saving as it once was, but the message is still clear: overspending is bad. Says Garon: "There is real worry in government and Japanese society that if consumption is not restrained, you are going to get an American-style society that worships credit cards."

Fashioning Japan into a nation of big savers may have made sense when the country was catching up to the West. Japan's financial system was set up to channel money from households into industries that government bureaucrats viewed as crucial, such as steel and shipbuilding. Now, however, it's a recipe for constant trade friction. But to really encourage consumption at home, the government would have to implement sweeping reforms, such as changing a tax system that rewards saving and provides little relief on mortgage payments. So far, that's not on the government's agenda. The Finance Ministry's spending crusade is reminiscent of the Ministry of International Trade and Industry's "Import Now" campaign of the 1980s, says Akio Mikuni, president of Mikuni & Co., Japan's only independent credit-rating firm. The ministry urged Japanese to buy more imports, but it did little to lower barriers keeping out foreign wares. "There is no real effort to increase consumption," says Mikuni. "They haven't changed the system or the philosophy."

Japanese showed they could shop during the 1980s, when stock and land prices shot up, sending rivers of cash flowing through the economy. Even today, young single women continue to do their bit, shelling out small fortunes on designer clothes and meals in chic Italian restaurants. Typically living at home, they are among the few Japanese who can afford to spend freely, and they do--most of their disposable income, according to Masahiro Matsuoka, an SBC Warburg retail analyst. Young women are also the driving force behind a recent wine fad that's swept the country. Consumption of wine jumped 30% last year, according to beverage producer Suntory. Sommeliers give TV seminars on exotic vintages, and some enterprising companies sell wine-flavored instant curry.

And despite their worries, Japanese continue to splurge once in a while, usually on "lifestyle" items: aromatherapy is big, and pedigreed dogs are in. British-style flower beds and gardens are trendy, too, although they have to be planted on a bonsai scale on typical Tokyo balconies. Still, as Hashimoto knows, consumers must start buying more than wine and roses to turn this economy around.

--With Reporting by Sachiko Sakamaki and Hiroko Tashiro /Tokyo