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Japan PM's vague call for stimulus could backfire

Source: Thomson Reuters Foundation - Wed, 17 Oct 2012 11:01 GMT
Author: Reuters
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* Govt under pressure to lift economy, faces elections soon

* Not enough details to gauge stimulus impact, analyst says

* Japan govt spending bucks global trend for consolidation (Recasts story)

By Stanley White

TOKYO, Oct 17 (Reuters) - Japan's prime minister ordered a new round of stimulus to try to revive economic growth but offered so few details about the size and contents of the package that it is unlikely to ease worries about the faltering economy.

Having promised a national election "soon", Yoshihiko Noda is under pressure to lift the world's third-biggest economy after growth stalled in recent months, raising concerns it could slide into a recession.

Noda asked his cabinet to compile the package by next month, but the government has not made a decision on how much it will spend, Finance Minister Koriki Jojima said.

The government lacks the strength to push through a new spending bill in the divided parliament, so the stimulus will not involve new bond issuance. It could tap budget reserves to fund the new plan as that does not require opposition votes.

"Considering what the government and the central bank are forecasting, I doubt we can simply stand by and let the economy continue as it is," Jojima told reporters.

"From here on, we'll decide what the details of the stimulus package will be."

Japan's economy is forecast to grow 0.4 percent in the January-March quarter of next year and 1.7 percent for the full fiscal year to the end of March, a Reuters poll on Oct. 11 showed.

Japanese media reported earlier on Wednesday that the new measures will include spending on renewable energy, healthcare and agriculture and will total about 1 trillion yen (${esc.dollar}12.7 billion), which economists said is too small to have a lasting impact.

Noda's attempt to draw up a spending plan comes as most industrialised nations are tightening budgets to rein in debt built up during the global financial crisis.

"The government's first motivation is that the economy is close to a recession, " said Masamichi Adachi, senior economist at JP Morgan.

"The second motivation is that an election is close, so the party in charge is expected to show its competence. There's not enough details on the size and specifics of this proposal. It's difficult for anyone to think this will be effective."

The package, borrowing from the government's growth strategy, will include measures to help companies take advantage of a strong yen, Japanese Economics Minister Seiji Maehara said.

Japanese policy making has ground to a halt since the end of the regular parliament session last month as the opposition tries to use its ability to block legislation to force an election.

Noda promised to hold a national vote "soon" in exchange for opposition support in August to pass a sales tax hike, a major step to reduce the country's public debt burden that amounts to twice the size of the ${esc.dollar}5 trillion economy.

Since then, Noda has been coy on the timing of the vote as public opinion polls show his Democratic Party would suffer a heavy defeat in an election.

The polls show that the public has grown frustrated with a series of missteps by the ruling party on foreign and energy policy and the recovery efforts from last year's earthquake and nuclear disaster.

Analysts said the spending plan will leave Noda open to criticism that his fiscal policy is falling into disarray because he would be tapping reserves in a budget that is not completely funded yet.

Japan is seven months into the fiscal year that started in April and the government has yet to pass a bill needed to sell bonds to fund almost half of the budget because of a standoff with the opposition.

Unless the bill is passed, the government could run out of money by the end of November, which has drawn close scrutiny from ratings agencies Moody's Investors Service and Standard & Poor's.

For urgent needs, the government could dip into reserves this month, said Jojima, who was unclear about which policies the government considers "urgent."

Japan has been hit by a several ratings cuts in the past two years because of concern it the government was not doing enough to curb its debt burden. But Japan has avoided a spike in bond yields because domestic investors hold most outstanding government bonds. (${esc.dollar}1=78.90 yen) (Additional reporting by Rodney Joyce in Bangalore and Dan Bases in New York; Editing by Chizu Nomiyama)

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