Safer to expect nothing from Japanese package

As is their custom, the currency markets expect to be disappointed by the package of measures the Japanese government is due to announce today. The reason is simple: nobody thinks the authorities can actually do much in the short term to remedy the effects of the strong yen and weak economy.

That, after all, is the experience of the past decade: and unless and until the governments can mug the markets with a second Plaza agreement (and that only worked for a while), it is safer to expect nothing.

The yen's near-20 per cent rise this year is a further blow to an economy that is still on its knees. Real national output has been flat for two years. Prices are also flat or falling. The massive currency appreciation could trap the country in a deflationary spiral.

So it is easy enough to see why the government wants to do something. The financial system is wobbling along the brink of a crisis. The health of the banks remains a matter for concern. Worse, voters in local elections have started to elect comedians.

Tomorrow's package is unlikely to go far enough, however. Most people are betting on a further cut in the official discount rate. It has stood at a low of 1.75 per cent since October 1993. As money market interest rates have fallen in the past two weeks, a reduction would be partly symbolic. Yet the symbolism would still be powerful.

The government's own package is likely to apply a fiscal stimulus to the economy, with an increase in spending for the financial year just started. The trouble is that the previous fiscal packages, amounting to 8 per cent of gross domestic product, among the biggest expansions ever mounted by a peacetime government, have not been a conspicuous success.

Another element will be speeding up deregulation to boost imports. Worthwhile, but long-term, not short-term, in its effects. The Japanese authorities are also stressing the importance of international co-ordination on exchange rates. They say there will be serious discussions with the US authorities this weekend. The markets are sceptical about inter-governmental chat accomplishing anything.

What might help the package succeed is its timing. The yen has risen so far that few dealers have big positions, for fear of being stung by a reversal of this year's currency movements.There is nobody in the market short of yen and seeking to buy. Both the currency and the Japanese stock market, down 20 per cent this year, look oversold and must soon bounce - but only because markets are cyclical, not because governments can make much difference in the short term.

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