The Japanese Prime Minister, Mr Ryutaro Hashimoto, finally bowed to intense pressure at home and abroad yesterday and said he would bring in permanent income tax cuts next year.
"As a result of a permanent review of the tax system, we would like to implement tax cuts, starting next year, that will be supported by the public," he said in Nagoya, in central Japan, as he campaigned for Sunday's upper house elections.
Mr Hashimoto said this may include a cut in the top tax bracket, which now stands at 65 per cent. Japanese media unanimously interpreted his comments as an announcement of permanent tax cuts.
He said his Liberal Democratic Party would begin an in-depth debate on tax reform on July 16th. He said he was also reluctant to lower the minimum tax threshold.
The dollar climbed against the yen shortly before Mr Hashimoto's news conference and held firm around 139 yen after his comments.
Mr Hashimoto is also facing tough election polls which show his party will struggle to win new seats in Sunday's elections and is unlikely to capture a majority in the chamber. He hinted at tax cuts on Friday during a campaign trip, teasing financial markets. But he later denied he was directly planning them.
Merrill Lynch's Mr Ronald Bevacqua noted he also faced considerable opposition from within his party and the Ministry of Finance (MoF) to tax cuts.
"There are still many people in the LDP and the Ministry of Finance who are very powerful and opposed to this," he said. "It has taken a long time to overcome the power of the MoF. Everything that has happened in the past few months has reversed seven years of MoF power."
Mr Hashimoto's statement follow his promises to set up a bridge bank to tackle the nation's huge bad bank loans and the announcement in April of a record-sized spending package to revive the economy.
"Financial market scepticism is one of the most positive things to happen to Japan, it forces the authorities to stay on their toes. The LDP has gotten the message," said Mr Bevacqua.
Mr Hashimoto also repeated his long-held promise to cut corporate taxes within three years, likely bringing a cut from the current 46 per cent to 40 per cent.
