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Beset by risks, Japan seeks boost from stimulus

Published on NewsOK Modified: January 11, 2013 at 2:02 am •  Published: January 11, 2013

TOKYO (AP) — A 20 trillion yen ($224 billion) stimulus package announced Friday by Japan's newly installed prime minister Shinzo Abe will likely give the recession-struck economy a quick boost, but at the risk of adding to the country's gargantuan debt without fostering sustainable, long-term growth.

The "Abenomics" strategy of "ultra" monetary easing and hefty government spending is bound to give the sagging economy a lift in coming months, perhaps even before a July election for the upper house of parliament that is viewed as a key test for the ruling Liberal Democrats.

"For the short-term, this makes a lot of sense," said Masayuki Kichikawa, an economist with Bank of America-Merrill Lynch in Tokyo. Abe "needs to stimulate the economy to win the upper house election."

A strong economic recovery has eluded Japan for more than 20 years since the bursting of its financial bubble in the early 1990s, and previous governments have faced criticism for failing to move aggressively enough to foster growth. The rapid aging of the population, a shrinking workforce, the global crisis, natural disasters and a weakening of Japan's industrial competitiveness have hindered efforts to get growth back on track.

But the stimulus will add to Japan's massive public debt and could fuel wasteful spending on unneeded construction projects.

"The size is huge, incredible," said Masamichi Adachi, an economist with JP Morgan Securities in Tokyo. The extra spending, which will be the basis for a supplementary budget for the remainder of the fiscal year that ends March 31, will make Japan's fiscal situation "very challenging," he said.

At a news conference, Abe said the measures are intended to spur a 2 percentage point rise in real economic growth and create some 600,000 jobs.

"We will break away from the chronically shrinking economy and aim to create an economy that can produce innovation and new demand that subsequently expand jobs and income," Abe said. "To regain a strong economy, we need bold monetary policy and flexible fiscal policy."

Japan's government debt is more than 200 percent of its gross domestic product, the worst among the industrialized nations, though the country's massive savings and the fact that most debt is held domestically has prevented any serious trouble in its debt markets, so far.

With luck, the policy could help get the economy back on track for the short-term, Adachi said, especially if recoveries in the U.S. and China and a weakening of the Japanese yen against the U.S. dollar provide extra help.

But the impact in the medium and longer-term remains to be seen.

Japan's economy fell back into recession last fall as growth dragged due to weakening investment and the blow to exports from weak demand in Europe and China. Sales of Japanese cars and other products in China were hammered by anti-Japanese riots set off by a territorial dispute that has yet to be resolved.

Abe, who is serving his second term as prime minister and whose record in his Sept. 2006 to Sept. 2007 first term was undistinguished, has declared the economy his top priority.

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