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Friday, August 7, 1998 Published at 05:28 GMT 06:28 UK

Business: The Economy

Japan unveils $110bn rescue package

Keizo Obuchi faces a huge task to restore confidence in the economy

Japan's new Prime Minister, Keizo Obuchi, has unveiled a package of measures aimed at restoring consumer confidence and boosting the ailing economy.

Economist Jasper Cole: 'The current dragging down of conditions will continue'
The measures include tax cuts worth more than $40bn and plans to boost government spending by nearly $70bn dollars.

Jobs on the line

To cheers from members of his Liberal Democrat Party Mr Obuchi said he was confident the measures will lead to a recovery within two years and was prepared to sacrifice his own Cabinet in order to put the economy back on track.

[ image: Traders were unimpressed by Mr Obuchi's speech]
Traders were unimpressed by Mr Obuchi's speech
"By staking the future of the Cabinet, I am determined to spare no effort to bring the Japanese economy back on track in one or two years," Mr Obuchi said in his inaugural policy speech to Japan's parliament.

In an address keenly awaited by the international financial community, Mr Obuchi also pledged to clean up the bad debt situation in the finance sector.

He said he would implement a plan to prevent bank failures as a matter of priority.

Cautious response

Mr Obuchi speech struck a confident and determined tone and was designed to reassure financial markets that Japan was acting decisively to clear up its financial problems.

[ image: Japan's economic recovery could take two years]
Japan's economic recovery could take two years
But the package of reforms will not come into effect until next year and received a lukewarm reception from Japanese investors.

Japanese shares slipped after the announcement, with dealers concerned that Mr Obuchi failed to reveal any fresh measures to stimulate the economy.

The Nikkei index fell 47.05 points to close at 15,829.17.

The Japanese yen also lost ground on Friday, falling to more than ¥145 against the dollar.

BBC Tokyo Correspondent Juliet Hindell: 'It was a very strong speech'
Yasuhisa Morikuni, assistant vice president at Bank of America, said: "Obuchi's speech was not surprising at all. His remarks were generally in line with his comments made when he formed the new cabinet."

"I feel that Obuchi still lacks clear vision and there are still questions about how he can carry out these plans effectively and quickly," he added.

Tax cuts

Mr Obuchi has pledged to cut taxes by far more than the 6 trillion yen ($41bn) that he originally proposed.

Under the plan the highest rate of tax is set to be reduced to 50% from 65%.

The corporate tax rate will also be lowered from 46% to 40%.

The Japanese government plans to issue new bonds to finance the tax cuts and its spending spree.

Under pressure

Mr Obuchi has been under pressure to produce a more decisive economic policy than his predecessor, Ryutaro Hashimoto, who stepped down after the ruling Liberal Democrats performed poorly in elections for the Japanese Upper House.

It is hoped that the tax cuts will stimulate consumer spending and help bring some companies back from the brink of bankruptcy by restoring sales and profits.

Senior Researcher with Matsui Marine Research John Newfer: 'Can he cut deals with the opposition?'
Fiscal policy is one of the last economic tools the Japanese government can resort to. The country's interest rates are among the world's lowest. Cutting taxes, however, will add to Tokyo's headaches, as it will increase an already high public deficit.

Japan's recently appointed Finance Minister Kiichi Miyazawa earlier said the government would finance the tax cuts by issuing new bonds.

He said future taxpayers would face serious financial burdens as a result.

He indicated, however, that his main priority was the economic recovery.

International concerns

Governments, economists and investors around the world have been closely watching what Mr Obuchi's has to offer.

Japan is the lynchpin of Asia's economy, and worries about the country's economic future were the reason for this week's dramatic losses on stock markets in Europe and the USA.

The US Government has repeatedly called on Japan to push through economic reforms as quickly as possible, including a radical shake-up of the country's troubled banking sector which is struggling under a $600m mountain of bad debts.

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