Japan Plans Stimulus, but Economy Still Likely to Fall into Recession

By Jason Simpkins
Associate Editor

Japanese Prime Minister Yasuo Fukuda will spend about $108 billion (11.7 trillion yen) on a stimulus package that critics say is more of an attempt to salvage political support than it is a serious effort to rescue an economy teetering on the brink of recession.

While the plan is being spun as a life preserver for Japanese consumers and businesses struggling with high food and energy costs, it includes just $18 billion (2 trillion yen) in new spending. Most of the package will be allocated to loan guarantees for small and medium-sized businesses and will not necessarily translate into bottom line growth.

"The program earmarks 2 trillion yen in real spending, but probably barely half of it will contribute to boost [gross domestic product (GDP)]," Kyohei Morita, chief economist at Barclays Capital (ADR: BCS) in Tokyo, told Bloomberg News. "The government needs to provide steps to encourage spending by companies and households, but no such steps are in the package."

Another analyst, Richard Jerram of Macquerie Securities Ltd., said most of the stimulus package is "padding from lending related measures" and "insignificant."

That's because the $18 billion in additional spending amounts to a mere 0.4% of Japan's GDP. By comparison, the $150 billion stimulus package produced by the U.S. government earlier this year equated to 1.3% of U.S. GDP.

With its economy shrinking, Japan will almost certainly need more help if it is going to avoid a recession. The world's second largest economy contracted 2.4% in the three months ended June 30 after expanding 3.2% in the first quarter.

Japanese exports fell for the first time in three years, dropping 2.3% as the global economy hit a stumbling block. Imports fell by 2.8%.

Meanwhile consumers have been put under siege by soaring costs. Japan's core consumer price index, which excludes food prices but includes energy, jumped 2.4% in July, the quickest pace in almost 11 years, according to the Ministry of Internal Affairs. Gasoline prices soared 28.7% in July.

Rising prices have also discouraged consumer spending, especially as weakness emerges in the labor market. Consumers expect prices to be 9% higher by June 2009, according to a recent central bank survey. Spending by Japanese households fell 0.5% to an average $2,724.80 (298,366 yen) in July from a year earlier - the fifth straight monthly decline.

"The increase in oil and commodity prices is damaging corporate profits, while rising inflation is hurting households," said Mamoru Yamazaki, chief economist for Japan at RBS Securities.

Unemployment fell to 4% in July, down from 4.1% in June, but the ratio of jobs available to each applicant fell for a sixth straight month to 0.89 - the lowest since October 2004.

However, the stimulus package being offered by the Japanese government won't do anything to bring prices down or create jobs, which has led many analysts to write the measure off as more of a political band-aid than an economic one.

Approval ratings for Fukuda's Liberal Democratic Party (LDP) are stagnant at around 30% and a lower house election must be held by September 2009, but could come sooner.

"More so than raising GDP, what the LDP really wants is to raise its approval rating," said Barclays' Morita.

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