In a political embarrassment for the prime minister one week before national elections on July 12, Hashimoto was forced to put to rest campaign comments last week interpreted as meaning permanent income tax cuts were possible after the poll.

Hashimoto made the comments the day after Japan on Thursday went some way towards answering global demands for action with a plan to clear 77 trillion yen ($546 billion) of problem loans through "bridge banks" to take over failed institutions. "I never said permanent tax cuts," Hashimoto told television Asahi on Sunday. "I just said we would review the tax system to make permanent reforms."

"Of course, I don't think as a result of the reforms, we would end up with a tax rise, but I can't guarantee a tax cut, it's possible it might also be neutral," headded. Hashimoto, whose political survival depends on how his Liberal Democratic Party (LDP) fares in the poll, was forced into admitting the tax issue was still open under grilling by reporters and opposition leaders on television talk shows.

Although markets were briefly cheered by Hashimoto's Friday comments, they held back from a major rally, fearing they were an election ploy that would not be carried through. Hashimoto, who denied his comments were election-related, said the misinterpretation of his remarks was because he had long held the view that tax reform was needed.

On Saturday, foreign minister Keizo Obuchi appeared to backup interpretations of the remarks as meaning permanent tax cuts were on the way, a view splashed on newspaper front pages. "The prime minister himself mentioned making tax cuts permanent. He also mentioned lowering corporate taxes to global standards, and we must keep a public promise made by our prime minister during campaigning," Obuchi said at a joint news conferencewith US secretary of State Madeleine Albright.

But in a comment that raised questions about disarray in economic policymaking, LDP secretary-general Koichi said Obuchi "misunderstood" his prime minister's remarks.