Japan Planning New $100 Billion Stimulus

Money Morning
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Japan plans to introduce a new economic stimulus package that includes new spending of at least $100 billion, the country’s finance minister said today (Monday).

Japan’s export-dependent economy continues to struggle as world demand plummets and domestic demand remains weak. The economy shrank by 3.2% in the fourth quarter and analysts expect it will continue to slide throughout the first half of the year. That would make for a record five consecutive quarters of contraction.

To combat the deepening recession, Prime Minister Taro Aso has called for a new raft of stimulus measures that will exceed 2% of gross domestic product (GDP).

The prime minister has instructed us to compile measures that would include real spending of more than 2% of GDP as we take into account a fall in our economy, which is bigger that other leading nations, as well as the need for international cooperation,” Finance Minister Kaoru Yosano told reporters.

The world’s second-largest economy will contract by 6.6% this year, the most since 1945 and steeper than declines of 4.1% in the euro area and 4.0% in the United States, according to forecasts by the Organization of Economic Cooperation and Development.

The new spending adds to the $119 billion of stimulus spending that has already been announced. The new plan includes the creation of a safety net for non-permanent workers, providing more credit and financing to besieged corporations, and expanding the role of clean energy technology such as solar power, Reuters reported.

There’s also a possibility that the Bank of Japan will broaden the type of bonds it accepts as collateral at the culmination of a two-day policy that started today, according to the Nikkei business daily. The BOJ currently accepts only publicly offered bonds, but could expand that to include municipal bonds and bonds issued privately to financial institutions. Such a move could help regional banks raise capital and boost lending more effectively.

“Regional banks may not hold a lot of government bonds that they could use as collateral, but they do tend to hold a lot of municipal bonds,” Hirokata Kusaba, senior economist at Mizuho Research Institute, told Reuters. “This is a policy designed to improve liquidity at smaller banks and I am sure they would welcome it. It could be seen as a pre-emptive measure the BOJ is considering just in case credit markets start to tighten again around earnings season.”

Japan’s benchmark Nikkei 225 stock index (^N225) jumped 108.09 points, or 1.24%, to 8,857.93 today. It has now risen in each of the past four trading days.

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