What is happening in Japan is really more important than what is happening in Britain. This is partly because the Japanese initiative is in every way much bigger than the sterling support package announced yesterday, but equally because it gives a pointer to policy options here in Britain should the economy move back into clear recession later in the autumn, or should interest rates have to be raised to support the pound following a French 'no' on 20 September.
The Japanese support package is probably the largest fiscal boost to any economy ever in peacetime. It has come in chunks: some measures to support the banking system and the stock market announced in mid-August; the main fiscal package of pounds 43bn of additional spending and other measures last week; and just this week official indications from Kiichi Miyazawa, the Prime Minister, that the government is prepared to use taxpayers' funds to allow the banking industry to write off some of its bad debts by giving the banks tax breaks to do so.
The policy, in essence, has two elements: financial measures to shore up the banking system and indirectly support the stock market, and spending measures to try to boost total demand. The result has been dramatic as far as the financial markets are concerned: a rise of 25 per cent in Japanese share prices over the past two weeks. This in itself greatly relieves the pressure on Japanese banks, which hold large tranches of shares in industrial and commercial companies. The greater the value of the banks' portfolios, the greater the ability of their balance sheets to carry loan losses.
All this is helpful. Still to emerge are the details of the ways in which the Japanese government will help the banks. It is expected, for example, that central and local government may support the property market by large-scale purchases of commercial properties. This would mean that banks holding these properties would not be forced to unload them in a disorderly way.
Since full details of support for the banks are not yet available, it is too early to take stock of the scale of the overall policy change. But a rough-and-ready judgement would be that, while the position of the financial system has now been stabilised, the pressures on the real economy will continue.
Outsiders have long argued that the Japanese authorities have the ability to support the banking system, should they need to do so. Everyone knew how to help banks in trouble and all that was needed was the political will to put the mechanisms into action. Paradoxically, now that the government's willingness to help has brought confidence seeping back, the need to help is reduced.
The problem is not over, for the bad debt overhang remains, and while the banks' underlying profitability has been increasing, it remains low by European or North American standards. But everyone now knows that if the worst happens and some big bank faces failure, it will be bailed out. Large companies can expect similar treatment if their failure threatens the security of the system as a whole.
By contrast, it is still unclear whether the fiscal package, despite its size, will rescue the real economy. The underlying strength of Japanese industry remains, but the present recession is looking more and more like the deep recession of 1974/5, after the first oil shock, than the more limited slow-downs in 1980/1 and in 1986/7.
The scale of the decline in manufacturing output has not shown through in a corresponding fall in GDP or in a rise in unemployment, for a number of reasons. A rise in housing investment has taken up some of the slack from the downturn in commercial construction. Companies have in general been able to avoid redundancies by cutting bonuses and working hours. And marginal workers (in effect women and people past the normal retirement age) have left the workforce altogether, for this is the first recession since 1974/5 when the nominal workforce of Japan has declined.
What is worrying economists in Tokyo is that there is a limit to the extent to which companies can trim their costs without shedding labour. These companies over-invested in capacity during the boom of the late 1980s and now need a pick-up in demand to justify that investment. But if they have to make people redundant, Japanese consumers will have a further reason to hold back on purchases: fear of losing their jobs.
This will seem very familiar to anyone in Britain. Where Japan is different is that, aside from having a strong current account, the central government has been in fiscal surplus. This has given it the leeway for the reflation package.
No one knows whether this package will work, and it is certainly true that large fiscal deficits in the US and the UK have failed to give much of a boost to demand. But taken as a whole, there are some parallels that are relevant to the UK.
One is that government help for the property sector can be useful if it stops banks selling buildings on to a flooded market. Another is that infrastructural investment - public works - is a well- tried and financially respectable way of priming the pump of an economy in recession, provided such investment is responsibly financed. Another is that financial markets will respond to indications that governments are concerned for their welfare.
This is not the time to bring in a new economic package for Britain. But the Government needs to be aware that it must work to maintain confidence at this stage of the economic cycle. It was interesting to see how raising some money to defend sterling helped confidence yesterday. There is a lesson there.Reuse content