Tokyo attempts to spend its way out of the recession

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The Independent Online
Tokyo - The Japanese government yesterday unveiled its biggest programme of spending and investment in the latest attempt to spur the country's sluggish economy and prevent a slide back into recession. But private economists believe it may not be enough to put the world's second- biggest economy back on its feet after a four-year slow-down.

Five similar doses of fiscal medicine have been applied in the past three years to little effect. Moreover, the package did not contain steps widely regarded as necessary to perk up the economy, such as tax cuts on land and securities transactions, and the reduction of stifling economic regulations.

"The package may prevent the economy from toppling into a downward deflationary spiral, but it doesn't set it on a balanced recovery path," said a Mitsubishi Bank economist, Don Kimball. Without a strong political leadership to push through sensitive measures, including bold economic deregulation, tax cuts and a decision on the use of public money to bail out ailing banks, "the economy will just stagger forward," Mr Kimball said.

The government says the package will pump 14,220bn yen (pounds 90bn) into the economy, but economists say the amount of new spending that will have a direct impact on the economy may be only about half that amount.

Economists believe the spending may push Japan's gross-domestic-product growth into the 1-1.5-per-cent range for the fiscal year ending 31 March. That represents a substantial improvement from recent estimates of 0.5- per-cent growth.

But the full effect of the package may take longer to achieve results. Some economists say it may be more visible in the next fiscal year. The Finance Minister, Masayoshi Takemura, said the effects probably will be spread out over more than a year.

In Washington the US Treasury Secretary, Robert Rubin, called the package "significant." He said: "The Japanese authorities have taken a series of constructive policy actions in keeping with the co-operative strategy for growth and the adjustment of several imbalances set out in the April 25 G-7 communique."

Financial markets gave the package a mixed reaction. Tokyo's main stock index fell 1.5 per cent and the dollar eased off from 15-month highs. Traders said markets focused on problems still plaguing the economy, and were disappointed by the lack of tax cuts.

In a sign of its increasing skill in manipulating public opinion, the government heightened the impact of the package's announcement by lowering expectations beforehand. Initial leaks to Japanese media put the overall size of the package at little more than 10,000bn yen.

The package was announced two days after the government announced that the economy grew at an annual rate of 3.1 per cent in the April-June quarter.

But officials attributed much of the gain, which came after several quarters of near-zero growth, to extraordinarily low production in the previous quarter, owing to the Kobe earthquake on 17 January.

The spending includes public-works projects, disaster-rehabilitation projects and programmes to help areas affected by the earthquake. Other programmes include low-interest loans to small businesses, and efforts to promote scientific research and communications technology.