Japan's government agreed on a 7.2 trillion yen stimulus package today, aiming to prevent the economy from tipping back into recession as deflation persists and a strong yen threatens exports.
Economists said the spending, equal to about 1.5 per cent of gross domestic output, would not provide a significant lift to an economy dependent on overseas demand for machinery, electronics and cars.
The package was due to be compiled on Friday but the ruling party was forced to add 100 billion yen in spending to appease a small coalition partner whose support is needed to enact legislation smoothly.
The budget underscores the balancing act faced by Prime Minister Yukio Hatoyama and his Democratic Party, which is keen to avoid a recession ahead of an upper-house poll next year but also needs to fulfill its promise of fiscal discipline.
"This may help the economy somewhat," said Yasunari Ueno, chief market economist at Mizuho Securities. "But it doesn't even begin to address the more fundamental issues facing Japan, such as weaknesses in the global economy and deflation."
The world's second-largest economy has been growing since April-June on the back of a recovery in exports, but revised data due on Wednesday is expected to show much slower growth in the July-September quarter than previously estimated.
The yen's recent surge to a 14-year high against the dollar poses another threat to the recovery.
Growth is expected to slow further in the first half of next year as the boost wears off from a 15.4 trillion yen stimulus package compiled by the previous government under the Liberal Democratic Party.
The latest pump-priming comes after the Bank of Japan decided last week to make available 10 trillion yen to banks to push down money market rates.
Adding to worries about the economy, figures released on Tuesday showed Japanese bank lending grew at the slowest pace in two years in November.
"Japan's economic recovery is led by overseas government stimulus but is unlikely to be sustained because the planned domestic stimulus package will likely prove ineffective," said Seiji Shiraishi, an economist at HSBC.
"So no matter how much the Bank of Japan eases, cash would not spread broadly."
Financial markets showed a muted reaction to the news as it was largely in line with expectations.
The measure includes little new money. It will mostly be funded with contingency funds and savings made from freezing what the Democrats have designated as wasteful spending in the previous stimulus package under the LDP.
The new package includes subsidies for energy-efficient cars and household appliances, which were introduced by the LDP.
Reuters