The package had long been expected, but was larger than predicted, and the Tokyo stock market responded by racing to a 13-month high.
The measures were just in time for a meeting of G7 finance and foreign ministers in Tokyo and for the visit of Kiichi Miyazawa, the Prime Minister, to Washington on Friday. Japan has been coming under pressure from the Clinton administration to reduce its trade surplus with the US.
A similar stimulatory package, worth Y10,700bn, was announced last August but failed to give the economy the necessary jolt out of recession. Economists are divided on whether the latest package will prove enough to lift consumer and corporate confidence out of gloom.
The largest part of yesterday's package - Y10,600bn - was devoted to public works. One tenth of this will be spent on hospitals and schools as part of what the government describes as a new focus on 'education, electronics and ecology'. Much of this money will be spent on computers and, while it will be a welcome boost to Japan's domestic electronics companies, which are suffering a collapse in sales and a lack of new products, US computer makers are expected to compete strongly for some of the funds.
The package also includes tax breaks on housing loans and investment by smaller businesses, but there are no reductions in income taxes. Some members of the ruling Liberal Democratic Party, as well as opposition politicians, have argued that Japan's high income tax rates should be reduced, but opposition from the Ministry of Finance forced the plan to be shelved.
Hiroshi Mitsuzuka, chairman of the LDP policy affairs research council and the man in charge of co- ordinating the economic rescue package, said that the new spending would 'make certain' that the economy would achieve the government's growth target of 3.3 per cent for the coming fiscal year.
Economists estimate growth for the year to March at little more than 1.5 per cent.
Despite the reservations of some economists, the stock market gave the package a strong welcome. The Nikkei average rose 858.15 points to close at 20,740.29, its highest close since March last year.
Both domestic and foreign investors have been buying heavily on the stock market in the past month, partly in expectation of yesterday's package. The yen rose to record levels against the dollar of around Y112.75 in Far East trading, but was pegged back later by rumours of Bank of Japan intervention. The yen closed little changed in London at Y113.4 against the dollar.
Yesterday's package coincided with the announcement of a record trade surplus in the year to March. The customs-cleared surplus surged to dollars 111.34bn ( pounds 71bn), up from dollars 88.23bn the previous year. The previous high was dollars 89.74bn in 1986/7. Japan's surplus with the US alone widened to dollars 46.11bn from dollars 38.46bn.
Economists said the announcement would give the new US trade team plenty of ammunition for next week's summit. 'It is the one major thorn in the flesh of the US-Japan relationship as Miyazawa gets on the plane to go to Washington,' said Jesper Koll, chief economist at SG Warburg Securities.
The analysts said it would take time for the package to affect trade, and Japan would not start sucking in appreciably more foreign goods until the second half of fiscal 1993.
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