Tax cuts could be too late

TOKYO

JAPANESE STOCKS are likely to fall this week on expectations that Prime Minister Ryutaro Hashimoto's plan to cut taxes won't be enough to turn around the ailing economy. Bonds are expected to rise, on the other hand, as investors are reassured about the limited size of the plan.

"It was so very late in coming, and it was so skimpy," said Koichi Kurata, manager in quantitative research at Asahi Mutual Life Insurance.

Bank stocks may lead the decline on concern about the number of bankruptcies, especially among construction and real estate companies, will increase. Real estate companies, such as Towa Real Estate Development, are likely to slip after they cut their earnings forecasts.

The Nikkei 225 Stock average rose 6.21 per cent last week to 16,481.12. It may well fall below 16,000 this week, investors said. The benchmark government bond maturing in 2005 rose last week, pushing the yield down 5.5 basis points to 1.6 per cent.

"There's one less worry now, so investors are coming back to buy bonds," said Masahiro Inoue, manager at Sumitomo Marine and Fire Insurance. Contrary to earlier expectations, the government seems to be sticking to its commitment to cut the deficit, he said. He now wants to buy more bonds as he expects pent-up investor demand to push down the yield as far as 1.55 per cent.

Hashimoto promised on Thursday to cut taxes by Y4,000bn as part of a Y10,000bn injection of new money into the economy. The tax cuts, which follow a Y2,000bn cut earlier this year, failed to impress investors.

"Look around - you see the impact of the Y2,000bn tax cut; the impact of a Y4,000bn one will be very small," said Tsutomu Fujita at Merrill Lynch International Capital Management.

Mr Hashimoto also said the government will keep its basic goal of cutting the deficit, though he remains "flexible". Investors had been concerned that the government would reverse this policy and flood the market with bonds, driving down prices. Now the plans are clearer, investors are likely to be more confident to buy bonds as the economy isn't about to rebound right away, analysts said.

Stocks may also be pushed down by the flood of companies that announced a cut in their forecast for earnings after the close of trading Friday.

Towa Real Estate cut its current, or pre-tax, profit forecast 82.5 per cent to Y700m for the full year ended in March. Dai-Ichi Kangyo Bank said its pre-tax loss for the year that ended in March will be 6.7 per cent more than previously forecast.

Copyright: IOS & Bloomberg