Tokyo Market Takes Heart From Hosokawa Political Victory : Japan: Market up sharply on expectations that attention will now turn to economic stimulus.

TOKYO —  Stocks soared in morning and early afternoon trading today on expectations that the Japanese government, having survived a battle over political reform, will now quickly take steps to boost the stagnant economy.

With Saturday’s parliamentary approval of a compromise political reform package, Prime Minister Morihiro Hosokawa can now turn his full attention to economic issues, including trade talks with the United States and preparation of economic stimulus measures expected to total at least $120 billion.

Hosokawa had previously indicated he would resign or call new elections if he failed to enact anti-corruption political reforms during the parliamentary session that ended Saturday. Business leaders, investors and ordinary citizens had worried that a political vacuum would bring further delays in implementation of expansionary economic policies.

“My biggest task for now is how to boost the economy,” Hosokawa said after the legislative vote.

Prices surged on the Tokyo Stock Exchange today, with the Nikkei-225 index rising 965 points, or 5.1%, to 19,723 during morning trading--the highest intra-day level since Oct. 29.

The rally continued into the afternoon, with the Nikkei up 1,051 points, or 5.6%, to 19,809 shortly after the opening of the second session.

Foreign stock buying was also exceptionally strong in morning trading, continuing a monthlong trend.

“I think everybody’s breathing a huge sigh of relief,” said Kathy Matsui, an analyst for Barclays de Zoete Wedd Securities (Japan) Ltd.

“People are beginning to bet on a recovery,” said Geoffrey Barker, an analyst at Baring Securities Ltd.

The survival of the reformist Hosokawa government also raises prospects for enactment of broad domestic deregulation measures, which could make it easier for imports to penetrate the Japanese market, and for success in trade agreements with Washington specifically aimed at reducing Japan’s huge trade surplus with the United States, which hit $50 billion last year.

Hosokawa and President Clinton are to meet in Washington on Feb. 11 in a summit that will focus primarily on trade issues. Despite slow progress in negotiations, the two sides still hope to have agreements ready on various market-opening steps to be taken by Japan in such industries as automobiles and auto parts, insurance, telecommunications and medical equipment. Hosokawa also hopes to announce an economic stimulus package before the summit. Renewed economic growth should help reduce Japan’s huge trade surplus with the United States by drawing in more imports.

Chief Cabinet Secretary Masayoshi Takemura said Sunday that the government now aims to decide on a comprehensive package of pump-priming measures as early as Wednesday or Thursday.

The package could total from $120 billion to nearly $150 billion. It is expected to be divided roughly equally between income tax cuts and spending programs. A key issue that remains to be decided is to what degree--and when--the income tax cuts might be balanced by a consumption tax increase.

One strong possibility is that there will be a delay of one to three years between income tax cuts and a matching consumption tax increase. A significant delay is strongly favored by the Clinton Administration, which has repeatedly urged Tokyo to enact net tax cuts for a long enough period to effectively boost consumer demand.

The compromise on political reform between the ruling coalition and the opposition Liberal Democratic Party--in which Hosokawa largely yielded to opposition views on how the reform measures should be structured--touched off an immediate wave of optimism among business people who had feared a prolonged political crisis.

Resolution of the political reform issue should “clear the air hanging over the people and have a positive effect on the economy,” said Kosaku Inaba, chairman of the Japan Chamber of Commerce and Industry.