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Tatemae--pretense. Honne--the real thing. These are the key words in the debate in Japan over Prime Minister Ryutaro Hashimoto's plans to deregulate the economy and straighten out the country's troubled finances. If the Prime Minister is intent on delivering the real thing with his reforms, then Japan and its main trading partners will benefit enormously. If, however, his moves turn out to be mere tatemae, Hashimoto will be putting Japan's entire economic recovery at risk.

Many observers are willing to give Hashimoto the benefit of the doubt. His call for a thorough deregulation of the financial sector signals that this politician is trying to be a thoughtful reformer as well. But even though Hashimoto the man may be sincere, Hashimoto the Prime Minister must shepherd reform through the political and bureaucratic process, which so often in the past has blocked serious change. So a rapid move to deregulate the economy and institute sensible tax policies is by no means certain.

To get an idea of what the reformers are up against, look at the draft budget for fiscal 1997, which contains troubling hints that Hashimoto is being forced to cater to special interests. Although the budget keeps overall spending flat, the pork and tax hikes it does contain fly in the face of the commitment to reform.

NEW TRIBES. First, look at the pork. Not long ago, the Hashimoto government was saying that long-planned expansions of the country's famed Shinkansen bullet-train lines would have to be frozen in the name of fiscal probity. After all, as a percentage of gross national product, Japan's deficit is larger than any other major country's. But then the ruling Liberal Democratic Party's notorious zoku giin, or ''tribes'' of Diet members who push special interests, resurfaced. Given up for dead after the LDP lost its Diet majority several years ago, the zoku giin have stormed back with the LDP's return to power. They managed to get studies of the new train lines back in the budget, a key step toward the ultimate expenditure of $10.3 billion. Yet it's highly debatable whether such gargantuan spending would help the overall economy.

The draft budget also calls for a healthy hike in subsidies to farmers, especially those hit by liberalization of agricultural markets mandated by the global trade agreements. This is another area where the zoku giin have been having a field day. And massive public-works spending will go uncurtailed despite increasing calls for the government to encourage consumer spending through tax cuts, instead of doling out billions to cherished projects.

Indeed, many observers believe the draft budget's call for tax hikes is just what Japan's flagging economy doesn't need. If adopted intact by the Diet, as is almost certain, the budget will eliminate a two-year-old income tax cut that's worth $17 billion and will boost the consumption tax to 5% from 3% at a cost to consumers of $43 billion. Hashimoto contends these measures are needed to reduce the deficit. Others disagree. ''The best way to restore fiscal balance is not to increase taxes but to achieve sustained growth for many years to come,'' says Tetsuo Tsukimura, chief economist at Smith Barney International Inc. in Tokyo.

In the markets, meanwhile, Hashimoto and the Ministry of Finance have so far resisted the urge to intervene. That's a significant step back from the tradition of propping up troubled markets through a PKO, or price-keeping operation. But some observers think that if the Nikkei stock average heads toward 15,000--the point where banks' hidden assets are dangerously depreciated--the government will step in, pouring pension funds and other money into the market and weakening the yen. Kiyoshi Kimura, general manager for research at Societe Generale Securities (North Pacific) Ltd., says the government has $8.5 billion set aside for that purpose.

GROWTH AGENDA. A PKO might provide some relief, but it's just the kind of action the Prime Minister should avoid. It's time for investors to get an honest valuation of the companies on the Nikkei. ''Survival of the fittest is the rule,'' explains Smith Barney's Tsukimura. ''A further decline in the market will sweep out troubled financial institutions. That's necessary.''

What's also necessary is a truly reform-minded budget. Hashimoto has to eliminate the white-elephant projects and engineer some serious tax relief for consumers. Speeding up the deregulation of transportation, telecommunications, retailing, and electric power would spark the kind of capital investment that's needed to put economic growth back on track. Sure, that's tough to do, and Hashimoto will undoubtedly have to make compromises. But too many compromises will just delay an inevitable, wrenching change. Pretense may be comforting, but for Japan it's also dangerous.

By Robert Neff

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Updated June 15, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.
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