Are you sure?

Japan looks for new ways to boost economy

  Japanese Prime Minister Taro Aso sought new ways to stimulate the economy on Thursday, as a 14.5% dive in machinery orders provided further evidence the global financial crisis is pushing Japan into recession.


Tokyo has already prepared an $18 billion stimulus package. But, a day after major central banks staged coordinated rate cuts to kick-start financial markets, Aso asked his ruling party to consider compiling another one. “It is extremely unclear how financial market developments will affect the real economy, and we need to respond to it,” Aso told reporters.

Lawmakers of the ruling Liberal Democratic Party met to discuss such a package, which may include loans for small firms and corporate tax cuts, and vowed to hammer out new measures by the end of this month.

The world’s second-largest economy has so far proven more resilient than Europe and the United States in the face of global financial turmoil, and its banks have bought into US lenders hit by bad subprime debt. The fear is that Japan will suffer as the crisis spreads beyond banking and markets.

The slide in machinery orders for August reinforced expectations that Japan is on the brink of recession, after the economy contracted at its fastest rate in seven years in the Q2. “There is a chance Japan’s economy may contract again towards the end of this year and early next year. In this market environment, corporate revenues and sentiment could worsen further,” said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute.

The Nikkei stock average fell to its lowest close in more than five years on Thursday, with hopes for new policy steps warring with concerns over the global economy. Asian Development Bank President Haruhiko Kuroda said he was closely watching how global share price falls affect Asia’s emerging economies. While the worst stage of inflation has ended for many Asian economies, the global economic slowdown was making a significant impact on the region’s growth, Kuroda told a news conference.



Unlike its neighbors, China, South Korea and Taiwan, Japan has not joined a round of interest rate cuts by central banks around the world, part of an effort to contain the worst financial crisis since the Great Depression. The Bank of Japan says its rates, already very low at 0.5%, do not need to be cut, though analysts believe it may be forced to move depending on the reaction of markets.

Japan’s fiscal policy has almost as little room for maneuver as its monetary policy, given the dire state of public finances. Aso said he was not planning to issue deficit-covering bonds to finance the new package because of budget conditions, although he did not rule out other forms of bond issues.

Japanese media reported the new spending package would be bigger than the existing ¥1.8 trillion ($17.92 billion) extra budget for the current fiscal year, which is expected to pass parliament next week. “Even if the government has to launch fresh economic stimulus measures, I do not think that additional spending on public works or interest rate cuts are necessary,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

The fall in often-volatile machinery orders was four times as big as the market had expected, and the third monthly fall in a row. Machinery orders are a leading gauge for capital spending, one of the key areas of growth for Japan’s economy in recent years as large exporters geared up production.

Government officials say the economy is either heading towards or already in recession, which Japan defines as a downturn in the economic cycle, rather than the more widely used definition of two straight quarters of economic contraction. (Reuters)