A nervous Japanese Government has revealed a US$105.8 billion (11,500 billion yen) economic stimulus package which includes an income tax cut, fuel subsidies and government loans to small and medium-sized companies.
But in reality it’s another ‘cheap’ stimulus package from a Government that’s under pressure from the sagging economy and high inflation, which topped 2% for the first time in a decade in July.
Unlike the recent US tax rebate that contained over $US140 billion in direct transfers to individual tax payers and companies, the latest Japanese Government package only included 1,800 billion yen in actual new spending and nearly 10,000 billion yen in government loans and credit guarantees, which may or may not be fully taken up and spent.
The package was announced late Friday after the inflation figures for July were issued and in response to news that the Japanese economy suffered its biggest contraction in seven years in the June quarter.
But other figures showed that industrial production rose and exports jumped sharply from June’s slump.
News of the package didn’t win much immediate support for the Prime Minister Yasuo Fukuda and his Government who are seen as dithering on inflation in particular.
The whole idea of the package seems to be to be seen doing something to stimulate the economy, without adding too much to inflation and other prices pressures (a positive) but also not adding much in the way of actual new spending. They will help businesses survive rather than stimulating new demand.
Apart from the inflationary pressures, there doesn’t seem too much to be worried about the Japanese economy. Despite the second quarter contraction, growth over this year is still positive, in a typically Japanese fashion (post 1989).
It seems to be all about doing something as cheaply as possible for maximum political gain at a time when wages are stagnating and economic activity has been sluggish.
The rise in Japan’s inflation rate of more than 2.4% in July was more than forecast, but economists are looking for it to moderate from this month onwards as petrol and oil prices fall.
Core prices, which exclude fresh food, rose at an annual rate of 2.4% in July, up from June’s annual rate of 1.9%. That was the sharpest rise in 10 years, since late 1997. Economists said that was due to a rise in October of that year in the goods and services tax in Japan. Excluding that rise, the surge in inflation was the sharpest in 16 years.
Energy-related products accounted for more than half of the increase in core prices while food added a third.
Stripping out food and energy costs, prices rose by 0.2%, sharp by Japanese standards and only the third monthly rise in 10 years, so pervasive has been the country’s price deflation and wages stagnation.
Meanwhile figures out on Friday showed that India’s sharp growth slowed in the June quarter (the first quarter of the country’s new financial year) to the slowest pace since 2004 just as inflation was reaching new highs.
Official figures showed the Asia’s third-largest economy expanded 7.9% in the three months to June 30 from a year earlier, down from the 8.8% annual rate achieved in the March quarter.
The drop in growth occurred as inflation hit an annual rate of 12.4%, due to higher fuel and food prices, which in turn forced the reserve Bank of India to raise interest rates three times since June.
Despite the slowdown, economic growth remains at double the pace of economic growth since independence in 1947.
The Central Statistical office said that construction growth slowed to 11.4% in the June quarter, while manufactures gained 5.6%, sown a touch from the previous quarter.
The central bank’s has forecast growth of 8% in the year to match, 2009, which is solid, but will be the weakest since 2003.
Although Indian stockmarkets rose sharply on Friday, they are still down 30% so far this year. Interest rates are around 8.8% and the rupee has fallen more than 8% against the US dollar from the start of the year.
