Outlook: Japan

WHEN AN economy is in recession, there are two conventional policy responses - to cut interest rates and to cut taxes. Unfortunately, both of these options are closed off for Japan. Interest rates are already so low that they cannot be cut any further, while even if the public finances allowed tax cuts, they tend to get treated by the Japanese as extra money for savings, so the effect on demand is marginal.

But there is a third way, albeit an unconventional one - to print money and find some mechanism for even handed distribution of it. Normally such a stratagem would be regarded as highly dangerous, since increasing the supply of money would be profoundly inflationary. But in a deflationary environment, such as Japan's, a little bit of inflation would be no bad thing. Under pressure from the Opposition, the Japanese government conceded this week that it would consider the idea.

So as to counter the Japanese propensity to save, moreover, the money would be distributed via a gift voucher which would be time limited. The thinking is that this will finally force the blighters to spend. Two questions. Is the mooted voucher of pounds 130 per head of population a sufficient stimulus. Given that the demand stimulus thus achieved would be just pounds 16.3bn, the answer must be no. And second, will not the Japanese merely use the voucher as a substitute for other spending. Nice try, but the policy needs a little work.