Beset by risks, Japan seeks boost from stimulus

A 20 trillion yen 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% 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.

The 20 trillion yen stimulus package includes 10.3 trillion yen in central government spending, about half of which will go to public works.

At a news conference Friday, Abe denied that his party was relying on time-worn spending strategies that fostered corruption and waste during the Liberal Democrats' more than half-century in power after World War II.

"That's not true," he said. "Let me make it clear that this is not a pork-barrel package."

A key aim is to promote reconstruction in northeastern coastal regions devastated by the March 2011 earthquake, tsunami and nuclear disasters. The government is also stepping up work on repairing and upgrading aging ports, tunnels, roads and other infrastructure — a priority that gained urgency following the collapse of a highway tunnel outside Tokyo in early December that killed nine people.

Among the dozens of other projects approved by the Cabinet on Friday are measures and equipment to step up police and coastal patrols, improved safety precautions at nuclear power plants, facilities related to police, traffic safety and aging military-related buildings.

The package will support research into cutting edge technology and medicine, rare-earth recycling and undersea minerals and resources.

It also includes funding for Japanese enterprises investing overseas and tourism promotion.

In his campaign for the Dec 16 parliamentary election that returned the Liberal Democrats to power after three-and-a-half years in the opposition, Abe stressed his determination to rebuild Japan as a "monozukuri," or manufacturing, nation and to ensure all Japanese can live secure lives.

In laying out his strategy on national television, Abe accused the previous government, led by the Democratic Party of Japan, of "utterly failing" to figure out how to expand the economic pie.

Many in Japan believe that long-term growth will hinge on fundamental reforms of the government's powerful bureaucracy, politics and educational system.

In picking key industries, such as renewable energy, for support Abe's administration is taking a strongly interventionist approach. Abe also has insisted that the Bank of Japan commit itself to an inflation target of about 2% and that it adjust its asset purchasing and other policies to allow for even more monetary easing after years of near-zero interest rates.

"Abenomics is big government, direct intervention," said Kichikawa. While that approach could end up protecting inefficient industries, it also could be used to complement new private sector initiatives, for example supporting investments in costly renewable energy development.

"We need to see how the Abe administration will conduct this 'new' strategy," he said. "Let's see what the 'new' means."

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