Japan Approves $116 Billion for Urgent Economic Stimulus

TOKYO — The Japanese government approved emergency stimulus spending of ¥10.3 trillion Friday, part of an aggressive push by Prime Minister Shinzo Abe to kick-start growth in a long-moribund economy.

Mr. Abe also reiterated his desire for the Japanese central bank to make a firmer commitment to stopping deflation by pumping more money into the economy, which the prime minister has said is crucial to getting businesses to invest and consumers to spend.

“We will put an end to this shrinking and aim to build a stronger economy where earnings and incomes can grow,” Mr. Abe said. “For that, the government must first take the initiative to create demand and boost the entire economy.”

Under the plan, the Japanese government will spend $116 billion on public works and disaster mitigation projects, subsidies for companies that invest in new technology and financial aid to small businesses.

Through these measures, the government will seek to raise real economic growth 2 percentage points and add 600,000 jobs to the economy, Mr. Abe said. The package announced Friday amounts to one of the largest spending plans in Japanese history, he said.

By simply talking about stimulus measures, Mr. Abe, who took office late last month, has already driven down the value of the yen, much to the relief of Japanese exporters, whose competitiveness benefits from a weaker currency. In response, Tokyo stocks have rallied.

But the government’s promises to spend its way out of economic stagnation also raise concerns about public debt, which has already mushroomed to twice the size of the Japanese economy and is the largest in the industrialized world.

At the root of Japan’s debt problems was a similar attempt in the 1990s by Mr. Abe’s Liberal Democratic Party to stimulate economic growth through government spending on extensive public works projects across the country. The effort did little to bring growth to the wider economy.

On Friday, Mr. Abe said that the spending this time around would be better focused to bring about growth through investment in innovation. He said the government would also invest in measures that would help mitigate the decline in the Japanese population by encouraging families to have more children.

“To grow in a sustainable way, we must help create a virtuous cycle where companies actively borrow and invest, and in so doing raise employment and incomes,” Mr. Abe said.

“For that, it is extremely important that we adopt a growth strategy that gives everyone solid hope that the future of the Japanese economy lies in growth.”

Mr. Abe has assembled two panels of chief executives and academics, including Hiroshi Mikitani, chief executive of a major e-commerce company and a harsh critic of the old guard of economic policy makers, and Heizo Takenaka, a former economy minister and outspoken academic known for his disdain of pork-barrel spending.

Meanwhile, a more aggressive monetary policy designed to beat deflation could fall into place when the Bank of Japan’s board meets Jan. 20-21 for its monthly review.

Mr. Abe has leaned on Japan’s central bankers — whom he has criticized as too cautious — to commit to an inflation rate of at least 2 percent, which would help convince businesses that Japan would not arbitrarily reverse course on its easy money policy. For more than a decade, the rate of inflation has been flat or negative, reflecting languishing personal incomes and corporate profits.

Some at the central bank, still wary of the tremendous asset bubble that loose monetary policy set off in the late 1980s, have warned of the dangers of stoking inflation. The Bank of Japan’s governor, Masaaki Shirakawa, has also bristled at the idea of bankrolling public spending by buying more government bonds.

With its benchmark interest rate already near zero, the bank has few options left, other than to buy up government bonds and other financial assets if it is to inject money into the economy.

In an interview with the Nikkei business daily published Friday, Mr. Abe said he would seek in writing an agreement from the bank to pursue a target of 2 percent inflation, though he said the agreement would not set a deadline. He also said the bank should consider policies that would increase employment as much as possible.

Mr. Abe said that he hoped to pick as Mr. Shirakawa’s successor someone who shared the government’s position on inflation and employment, according to the interview. The central bank governor’s term runs out in April.

Hajime Takada, chief economist at the Mizuho Research Institute, said in a note to clients Friday that there were still too many unknowns to assess the effectiveness of Mr. Abe’s economic push.

But by setting a clearly pro-business policy agenda, Mr. Abe has started to change the mind-set of investors and corporations who had all but given up on growth — and for that, the new prime minister scores high, Mr. Takada said.

Article source: http://www.nytimes.com/2013/01/12/business/global/japan-approves-116-billion-for-urgent-economic-stimulus.html?partner=rss&emc=rss