Obuchi chose a news conference with US secretary of state Madeleine Albright to send out the latest signal that Japan was working on permanent income tax cuts as a way of getting Japanese to spend more.

He said Japan must live up to the promise of permanent tax cuts laid out by prime minister Ryutaro Hashimoto in a campaign speech last week for Upper House elections on July 12.

Hashimoto said `permanent' tax reform was needed, a measure widely recommended by financial experts, including many in the United States, as a way to to spur languishing economic demand in Japan.

"The prime minister himself mentioned making tax cuts permanent. He also mentioned lowering corporate taxes to global standards...we must keep a public promise made by our prime minister during campaigning," Obuchi said asAlbright stood beside him. Japan acted on Thursday to clear its 77 trillion yen ($546billion) mountain of problem loans through a plan for public `bridge banks' to take over failed institutions while keeping sound borrowers afloat.

Obuchi said parliament should move sharply on the measures in a special session scheduled for after the election, but did not make clear if the session should consider permanent income tax reductions. "After the election is over, we will call the diet (parliament) and swiftly move to legalise these issues," he said.

Although global financial markets were briefly cheered by Hashimoto's comments on taxes, they held back from a major rally for fear that the remarks might be only an election ploy that would not be carried through after the poll.

Hashimoto has talked of a desire to lower Japan's income tax rates closer to those in other G7 nations but has advocated paying for this with a higher consumption tax.

A rise in the sales tax from 3 per cent to 5 per cent in April 1997was widely seen as contributing to the snuffing out of a fragile economic recovery. Albright, who was on a brief visit to Tokyo to reassure Japan it had nothing to fear from better ties between Beijing and Washington after US president Bill Clinton's visit there, praised measures Hashimoto took last week to clean up the banking sector.

On the last day of his visit to China, Clinton made abundantly clear that although the bad loan plan was a step forward, the United States was looking for more and wanted action not just words. "I think that what the markets are waiting for now is some action and a sense that if it turns out that the implementation of this programme is not enough, that more will be done, Clinton told a news conference in Hong Kong.