Japan’s cabinet has approved a huge economic stimulus package worth $US81 billion (or 7.2 trillion yen) of direct spending, and a further $US150 billion of non-cash aid.
It is more than double the size of the original cash spending that was put at $US31 billion, which was due to be announced on Friday, but was delayed after a key upper house ally of the Democratic Party of Japan Government objected to it and wanted it boosted substantially.
The spending – which amounts to about 1.5% of GDP (which is contracting)– will not involve large-scale new debt issuance as Prime Minister Yukio Hatoyama wants to avoid boosting the size of Japan’s already huge debt burden.
The package is meant to boost a fragile recovery from Japan’s worst post-war recession, which is now threatened by deflation and the strong yen’s impact on exporting companies.
Figures out today will confirm the rebound in growth that began earlier in the year is fading.
The cabinet of Prime Minister Yukio Hatoyama agreed on the size of the package (to be financed by an extra budget for the financial year to March 2010), after its announcement was delayed last Friday by opposition from the party led by financial services minister, Shizuka Kamei.
He is considered likely to keep calling for larger and debt-financed spending when the government compiles the budget for the fiscal year starting next April.
His party’s support is vital for getting the budget and the spending through Japan’s upper house.
"We made a cabinet decision on the emergency economic measures," chief government spokesman Hirofumi Hirano said. "The scale exceeds 24 trillion yen in terms of the value of projects."
The new package totals 24.4 trillion yen ($US274 billion).
That includes direct spending of $US80.6 billion as well as loan guarantees and other measures that do not require actual government outlays.
It would extend a reward program for energy-efficient appliances and loan guarantees for small and mid-size businesses, and include spending to help companies retain workers.
The cash component will come from the previous government’s first supplementary budget, which was worth 13.9 trillion yen.
The latest stimulus plan includes 3.5 trillion yen to help regions, 600 billion yen for employment and 800 billion yen on environmental initiatives.
The need for the new stimulus spending will be underlined today when the government will probably say third-quarter economic growth was slower than initially reported.
The revised growth figures, to be issued later today, will confirm the signals coming from monthly data for September showing a slowing trend, a situation that has spilled over into October and last month.
GDP rose at an annual 4.8% rate in the three months ended September 30, according to the first estimate issued last month.
Now the market is expecting that to fall substantially to an annual rate of 2.8%: still positive, but a sign the expansion from earlier in the year is tapering off.
Government figures released last week showed companies cut capital spending at a record pace in the quarter (which is Japan’s second of its March 2010 financial year).
The IMF and other forecasters say the Japanese economy will contract by more than 5% in calendar 2009, more than the 4%-plus fall expected in the euro area and a 2.7% shrinking in the US.
Japan’s exports have led the recovery, dragging industrial production and some other parts of the economy higher.
Exports had their best performance in a year in October, thanks to the strong spending and rebound in China and the impact of car scrapping plans around the world, which has helped the country’s important car sector recover (and boosted steel output as well).
But imports remain weak (thanks to low demand and falling prices from the strong yen, and lower contract prices.
That helped the trade surplus rise 42% from a year earlier to 1.4 trillion yen or $US15 billion, a sure sign the Japanese economy remains trapped in its old, bad ways.
Despite the export performance, industrial production slowed to its lowest rate of growth in eight months in October (and is more than 15% down on a year ago).
Wages fell for a 17th month, consumer prices fell a near-record 2.2% (and down 1.1% on a core, non food, non energy basis).
But unemployment fell to 5.1%, to continue the recent improvement in October.
The Japanese stimulus package (the third or fourth from a Japanese government in the past two years) comes as other countries around the world consider how to withdraw stimulus and support packages as economic growth recovers.
Australia is doing both: cutting stimulus spending and the Reserve Bank is raising interest rates.
Japan is a long way from where we in Australia are.
But besides this plan, the Bank of Japan released a 10 trillion yen credit program last week (that’s so-called quantitative easing) to fight declining prices.
Under the program, the central bank will offer three-month loans to commercial banks at 0.1%.
The Bank of Japan’s move and the surprisingly good employment report for last month in the US has seen a change in attitude to the value of the US dollar, with it rising against the yen.
The Tokyo stockmarket has risen more than 10% in just over a week after the central bank’s move.
