Revival plan delayed as Japan preps for election

By CNN's Alex Frew McMillan in Hong Kong

TOKYO, Japan -- Top figures from Japan's ruling coalition huddled Wednesday to discuss how to boost the country's flagging stock market.

But the policymakers broke, saying only that they need to act fast, and put off any sudden moves until after this Sunday's elections.

"We agree that a decision needed to be made quickly," Fumio Kyuma, a senior policymaker with the ruling Liberal Democratic Party (LDP), said.

"But one wonders whether it's appropriate to do that before the elections."

Tokyo's benchmark Nikkei index has spooked officials, hitting a 16-year low this week.

That and the saga of Japan's apparently endless economic slump has started to cut into the popularity of Japanese Prime Minister Junichiro Koizumi.

The LDP leader recently boasted record popularity levels, at 85 percent. But the Koizumi cabinet's approval rating dropped to 69 percent in July, according to the latest polls.

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The dip couldn't come at a worse time, with 121 seats up for grabs on Sunday in Japan's Upper House.

"The political reality is they have to be shown to be doing something," said Darrel Whitten, chief Japan strategist at ABN Amro.

"'It's the economy, stupid' -- of the five issues people were polled as responding to, the economy was one of them."

LDP victory expected

The LDP is still expected to coast to victory this weekend, along with its coalition partners, the New Komeito and the New Conservative parties.

But Japan's sudden stock slump has undone any 'Koizumi effect' in the stock market. Voters will only get more and more disenchanted, analysts say, if stocks and the economy don't improve.

That has lawmakers looking for kindling to spark the Nikkei's fire. They're considering capping Japan's capital gains, letting investors take up to 1 million yen tax-free.

There's also talk of cutting the capital gains tax from 26 percent as low as 10 percent. The prospect of a change helped the Nikkei rally over 12,000 -- briefly -- on Tuesday.

LDP policy chief Taro Aso said the government was putting off steps on a tax cut to avoid looking like it was currying favor with voters.

Still, he said the dire state of the Nikkei bothered him and requires action.

"You wonder if it's right for stock prices to fall beyond businesses' fundamentals," he said.

'Handkerchief to your sniffles'

Investors say it will take more than a tax cut to cheer the market long-term.

"It's not a negative. That being said, the basic nature of the exercise is like taking a handkerchief to your sniffles," Whitten said. "It does nothing to change the fundamentals."

Overseas investors have become increasingly suspicious that reforms are going nowhere under Koizumi. Japan's banks are piling up bad loans as fast or faster than they can write them off.

Big Japanese investors like life insurers have been cutting their stock holdings, to 48 percent of their portfolios in June, from a 2001 high of 52 percent in March.

Politicians want to get the Japanese public to move more of their $11.2 trillion (1,400 trillion yen) in assets into stocks. They tend to save it in postal-service pensions or in banks.

But they won't do that if they expect to lose money. After all, a capital-gains cut doesn't help if you have no gains.

"Individual investors are not taking money from the postal sector [because] they don't think stocks will go up," Whitten noted. "There's a lot of other people that don't think stocks will go up, including some of the biggest investors here."

Reuters contributed to this report.