-Caveat Lector- <A HREF="http://www.ctrl.org/"> </A> -Cui Bono?- WJPBR Email News List [EMAIL PROTECTED] Peace at any cost is a prelude to war! STRATFOR.COM Global Intelligence Update 17 February 2000 Local Governments Seize Economic Initiative in Japan Summary Japanese leaders are preparing to battle over a solution to their country's economic woes. As the economic malaise deepens, calls from local governments to decentralize power grow more urgent. Now Tokyo Gov. Shintaro Ishihara has devised a plan to tax the city's major banks, giving the city control over a large infusion of cash, free from central government's meddling. The central government knows the plan could result in an economic nightmare, but its ruling parties risk political suicide if they lash out against it. Ultimately, the administration will have to find an effective alternative - or lose control of the economy completely. Analysis The Tokyo metropolitan government in Japan is poised to pass a new law taxing the city's largest banks. Tokyo Gov. Shintaro Ishihara expects the law to raise almost a billion dollars in revenue - an attractive sum in a city with a $6 billion budget deficit and $60 billion in debt. The legislation has attracted overwhelming support in Tokyo, from 90 percent of the city's residents and both ruling and opposition parties. In a Kyodo News survey, more than half of the country's other prefectures voiced at least partial support. The legislation's popularity among local governments and the public stems from more than just empty coffers in city halls throughout Japan. Those behind the legislation, including Ishihara, are unwilling to sit idly by while the central government fails to restore Japan's economy. The legislation could further disable the city's crippled banks, making central government officials very anxious. But with general elections on the horizon, political imperatives are pressuring Tokyo's ruling parties to bite their tongues. Gov. Ishihara proposed the tax several weeks ago, sending bank officials and many economists into histrionics. The law will tax gross profit instead of net gains in banks with deposits of more than $45.7 billion. In other words, even banks with negative balance sheets will have to pay taxes. Critics argue that such a heavy burden - as much as 20 or 30 times the existing taxes - will keep the banks from paying off bad loans, thereby stalling economic recovery. The Japanese Bankers Association has even threatened a lawsuit if the government passes the legislation. But Ishihara and other proponents have ignored such criticism, as well as quiet pressure from Diet members, including Finance Minister Kiichi Miyazawa. Instead, Ishihara has painted the legislation as a necessary reaction to a domineering and ineffective central government. Calls to decentralize the government have existed for years. But as Japan's economic infirmity persists and intensifies, the calls have grown more urgent. Currently, local prefectures in Japan have very little control over their own finances. The Tokyo government receives less than 30 percent of the revenues it collects. As well, the prefectures have been forced to issue bonds to help finance the central government's deficit spending. The new tax would give the Tokyo government total control over a large infusion of revenue. The central government realizes that the tax could devastate the banking system if applied nationwide. Yet elections could come as early as April, and the parties must handle the situation carefully. If they crusade against the legislation, even on the grounds of shaky economics, they will be denounced as overbearing and unwilling to decentralize. The circumstances are especially troublesome for the Liberal Democratic Party (LDP), which seeks to resurrect its lost legacy as the country's number-one political authority. It must oppose the legislation, but would like to avoid bad publicity. As a result, top LDP members appear divided. Key Cabinet ministers, including the finance and home affairs ministers, have pressured Ishihara to change details of his plan. Others, such as Labor Minister Takamori Makino, have suggested that the decision "deserves understanding in light of the promotion of decentralization," reported the newspaper Asahi Shimbun. The LDP's Research Commission on the Tax System has undertaken the party's most significant effort to engage in political damage control. On Feb. 16, it announced that it would consider extending the tax nationwide to all corporations, not just banks - but only after the economy had fully recovered, perhaps in fiscal 2001. The announcement was clearly a stalling tactic, intended to soothe those who support the legislation because they believe the government will resist decentralization indefinitely. But ultimately, the central government - LDP included - must take forceful measures to regain control of the economy. Although the Tokyo bill now has enough support in the city assembly to win, the assembly won't vote until Feb. 23. That gives the central government and the banks a few days to increase the pressure. The bank tax initiative could easily spread to other prefectures; already, the LDP in Osaka has petitioned the governor to impose a similar tax. Unless the central government finds an alternative to Ishihara's solution, the battle for control over the country's economic policy will only intensify. (c) 2000, WNI Inc. **COPYRIGHT NOTICE** In accordance with Title 17 U. S. C. 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