TOKYO--Japanese and U.S. trade negotiators agreed yesterday to drastic economic changes to help cut the $49 billion U.S. trade deficit with Japan. Officials said the unprecedented pact would improve the quality of life in both countries.

In the wide-ranging accord, the U.S. agreed to raise its tax revenues. Japan said it would spend $1 billion more on public works in the next decade. The two measures are aimed at helping close the trade gap and easing trade friction.

"I welcome and endorse this joint report," President Bush said in Washington as the talks ended at the Foreign Ministry in Tokyo.

Prime Minister Toshiki Kaifu said that carrying out the reforms would be painful. "However, these measures are intended to achieve a major reform of the Japanese economy in the consumers' best interests," he said.

Kaifu praised Bush's willingness to consider tax revenue increases at the risk of a strong political backlash. Bush commended Kaifu for "his strong and courageous political leadership."

Linn Williams, the U.S. deputy trade representative, called the agreement, which followed telephone consultations between Bush and Kaifu on Wednesday night, "something no two other countries have done before."

Williams said the talks were "an important influence" on Bush's tax move, which is aimed at reducing the federal budget deficit. Many economists maintain that the deficit is a fundamental cause of other economic ills in the U.S., including the trade imbalance.

After four days of intensive talks, haggard but happy trade officials emerged with the 57-page report that included Bush's decision Wednesday to raise tax revenues--a departure from his campaign promise of no new taxes.

The report also carried a pledge by Japan to spend $2.77 trillion over the next 10 years on public works projects to stimulate demand for imports and help offset this nation's huge reservoir of savings. Japan has spent $1.7 trillion in the past 10 years.

The decision on public works represented a major compromise. U.S. officials had sought a 10-year, $3.22 trillion package, but Japanese officials resisted increasing their original offer of $2.68 trillion because of fears of inflation.

"We think that plan, along with President Bush's plan, would go a long way toward reducing the imbalance between Japan and the United States," said John B. Taylor of the Council of Economic Advisors.

He said the reforms were expected to have a gradual but lasting impact on Japan's trade surplus with the U.S., which totaled $49 billion last year.

Earlier, officials said the results of the reforms were expected to show up within two or three years.

Many of the reforms are indirectly related to trade flows.

The agreement also called for Japan to increase penalties for violations of anti-monopoly laws, facilitate legal action against unfair business practices and crack down on collusion and bid-rigging. The measures are intended to make Japanese business more open to foreign competition.

Japan also promised new policies to slow real estate inflation and encourage more efficient land use. The steps would help lower the cost of doingbusiness in Japan and improve the quality of lifefor average Japanese, who cannot afford to buy newhomes.

Japan agreed to relax restrictions on retailsales to let in more imports and open new businessopportunities.

In addition to stronger action on the budgetdeficit, Washington pledged to urge Congress toenact laws on family savings accounts and othermeasures to help increase U.S. savings andinvestment.

The U.S. said it also would enact measures toimprove education and worker training as along-term investment in the quality of the U.S.work force. Washington also promised to developprograms to promote exports while easingrestrictions on oil exports