Suffering from its worst economic downturn since the World War Two, Japan yesterday announced its biggest ever stimulus package. The Japanese cabinet last night approved the emergency measure, worth over 16 trillion yen (£91 billion). It is designed to boost the nation's gross domestic product by 2 per cent in its first year of implementation.
The measure, coming on the heels of a report by the Asian Development Bank warning that the economies of South Korea, Thailand and Indonesia will shrink this year, also includes billions of yen in aid for south east Asian countries.
The Finance Minister, Mr Hikaru Matsunaga, told a news conference in Tokyo that the package was the biggest ever compiled by Japan and contained all necessary steps "to get the economy out of the current severe situation." He expressed confidence that it would lead to a national recovery.
Companies and consumers would gain confidence in the economic outlook and the increased confidence would boost consumption and economic activities, Mr Matsunaga said. With the Japanese government under fire for its failure to stimulate demand at home, the Finance Minister said he would meet the heads of some financial institutions early next week to ask them to ease their severe lending stance as a way to solve the problem of lack of credit. Panels of the ruling Liberal Democratic Party and the government would also consider the question of income tax cuts. Critics fear that the Japanese economy, which has suffered eight years of malaise, could begin plummeting again once the bulk of the money is spent, because Japan has yet to tackle the fundamental problems of its state-capital economy.
Previous, spending plans by the Japanese government since 1992 have failed to kick-start the economy. Sweeping deregulation is considered crucial by many economists to effect a recovery.
The package is a "good step in the right direction," an official of the Organisation for Economic Co-operation and Development (OECD) said before the announcement, but the government must take comprehensive measures to pull the country out of its rut.
One of the problems facing the Japanese government is that if it allows ailing financial institutions to go under in deregulation, it would cause a massive loss of confidence. Another is that citizens with greater spending power may simply save the money because of a widespread fear that they will outlive their savings.
The package will boost Japan's gross domestic product by some 2 per cent in the year after the measures are adopted in a supplementary budget sometime before mid-summer, the Japanese Economic Planning Agency said. The government promised to submit the supplementary budget during the current parliament session which ends on June 10th.
The EPA said the calculation did not include two trillion yen in income tax cuts included in the package for next year which means the eventual boost from the package should be well above 2 per cent of GDP. Spending in the package will total 16.65 trillion yen and include fresh fiscal stimulus of around 12 trillion yen, the government said.
Among the key points are income tax rebates for this year and next, and increased spending on public works, environment and energy projects, telecommunications, health, welfare and education, natural disaster prevention and urban renewal.
The government also said four trillion yen would be invested in markets using postal savings funds and 700 billion yen in aid would be earmarked for Asian countries. The Japan Automobile Manufacturers' Association (JAMA) said it welcomed the package but regretted it did not include tax breaks to encourage owners to replace ageing cars.
