Japan is to pump another ¥15.4 trillion (£105bn) into its ailing economy in an attempt to avert the worst recession since the Second World War.
The stimulus package announced yesterday – equivalent to 3 per cent of GDP – is the second since the global recession took hold last autumn. It includes multi-trillion yen spending on childcare, education, nursing and medical services; subsidies for green technologies such as solar panels and environmentally friendly vehicles; infrastructure building schemes; loan guarantees to support business; and tax breaks for parents giving money to their children to buy houses.
Between ¥10bn and ¥11bn in bonds may be needed to fund the plan, pushing government debt – already a massive 170 per cent of GDP – even higher.
Although the boost is proportionately larger than those in other advanced economies, Japan is trying to plug a larger hole. After more than 20 years of stagnation – following a burst asset bubble and subsequent banking crisis starting in the late 1980s – the Japanese export-led economy is brutally exposed to the global downturn. The country's GDP declined by 3.2 per cent in the last quarter of 2008 alone, and the OECD is forecasting a contraction of 6.6 per cent this year. Michael Taylor, a senior economist at Lombard Street Research, said: "The latest stimulus may have a short-term beneficial effect, but in an economy shrinking as fast as this one it still only offsets one quarter's decline."
Since the 1990s, the government in Tokyo has poured vast sums into a series of attempts to kickstart an economy hampered by deflation and a culture of saving. But Japan has fundamental structural issues which cannot be wished away by government spending. With little help from domestic demand, the economy has relied heavily on international trade. It is the largest exporter of cars in the world, and also a major source of electronics. But in February, exports – which account for 10 per cent of GDP – were down by a whopping 50 per cent year on year. "Japan's exports, and industrial production, have absolutely crashed and that is feeding through to the jobs market, and causing further damage to already weak consumer spending," Mr Taylor said.
The country's other big problem is its corporate sector's huge cash pile. Last year some 6 per cent of GDP was tied up in corporate cash balances, compared with levels nearer 2 per cent in other developed economies. Such sums salted away, rather than circulated via dividends or investments, act as a further brake on an already moribund economy.
"Japan is simply not able to put together a stimulus of the magnitude needed to turn the economy around," Mr Taylor said. "Whatever the effect of these latest measures, they are not enough to change forecasts that it will contract, peak to trough, by around 10 per cent. Japan will only recover on a sustainable basis when the global economy picks up and exports start to pick up too."
The stimulus package was launched just a day after the prime minister Taso Aso published his government's long-term economic growth strategy. The scheme is designed to boost domestic demand by at least ¥4trn and create two million jobs in the next three years, and to boost GDP by ¥120trn and create four million jobs by 2020.
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