New Stimulus Won't Save Japan From Deflation, Soaring Deficit

Japan today (Tuesday) unveiled an $80.6 billion (7.2 trillion yen) stimulus package to bolster the economy and promote employment. But a sharp drop in exports, declining prices and rising joblessness should continue to plague the world's second-largest economy.

Japan's stimulus package will put $39 billion (3.5 trillion yen) toward supporting regional growth. Some $9 billion (800 billion yen) will go to environmental programs and $6.8 billion (600 billion yen) will be used to promote job growth. Much of the remainder will be used to offer loan guarantees for small companies to ease a credit crunch.

Japan's third-quarter gross domestic product GDP rose at a 4.8% annual rate, after revised growth of 2.7% in the second quarter. But the nation's currency, which is hovering around a 14-year high against the dollar, is jeopardizing the recovery by making Japanese exports more expensive for other countries.

Latent demand for Japanese goods and a declining dollar have sent Japan's economy into a deflationary spiral. Japan's core consumer price index (CPI) – which excludes fruit, vegetable, and seafood prices but not oil products – fell for an eighth straight month in October, tumbling 2.2%. That followed 2.3% decline in September.

The BOJ expects deflation to last through March 2012, the CPI to decline by 0.8% in the next fiscal year and 0.4% in fiscal 2011.

That's bad news for Japanese exporters. Japan's electronics companies lose a combined $369 million (31.8 billion yen) in annual operating profit for each 1 yen appreciation against the dollar, according to a Daiwa Research Institute Ltd. estimate of 44 companies in September.

Today's announcement follows the Bank of Japan's (BOJ) decision last week to make available $115 billion (10 trillion yen) in three-year loans at 0.1% interest.

However, many analysts are skeptical that the added stimulus will be enough to prevent a double-dip recession.

"It will help prevent a sharp downturn but do nothing more," Yasuo Yamamoto, a Mizuho Research Institute (NYSE ADR: MFG) economist, told The Wall Street Journal. "Public works spending and temporary tax cuts won't create confidence because everyone knows they aren't sustainable given Japan's current fiscal conditions."

Japan's national debt is almost twice the level of its gross domestic (GDP). The Organization for Economic Cooperation and Development (OECD) predicts Japan's national debt will rise to more than 200% of its gross national product in 2011 from 170% in 2007, already the highest among rich nations.

Some of the financing for the new stimulus will come from funds the nation's Democratic Party culled from the previous government's budget. But it's unclear where the rest of the funding will come from.

"We have no idea how this spending will be financed," Carl Weinberg, an economist at High Frequency Economics, told The New York Times.

Japan's tax revenue will fall to $416 billion (36.9 trillion yen) this fiscal year, the lowest level since 1985, according to Hirohisa Fujii, Japan's finance minister. The tax shortfall will probably push new government bond issuance to 53.5 trillion yen this year, he said, the first time the deficit would exceed tax revenue since immediately after of World War II.

News and Related Story Links:

• The Wall Street Journal:
  
  Japan Unveils New Stimulus Deal
  
• The New York Times:
  
  Japan Offers an $80.6 Billion Stimulus Package
• Money Morning:
  
  Does the Bank of Japan Have Enough Juice to Overcome Nagging Deflation?
• Money Morning:
  
  Investors Can't Ignore a Rebounding Japan
• Money Morning:
  
  Japan's Economic Growth Accelerates, but Deficit Raises Concerns