09 Apr 2009
April 9 (Bloomberg) -- Japan's Prime Minister Taro Aso may unveil a 15.4 trillion yen stimulus package ($154 billion) to help revive an economy headed toward the worst recession since World War II.The ruling Liberal Democratic Party will propose the government spend about 3 percent of gross domestic product, according to a document obtained by Bloomberg News. Aso's third package since taking office in September would take total spending to 25 trillion yen.
Bond yields rose to the highest since November as Chief Cabinet Secretary Takeo Kawamura said Japan will issue as much as 11 trillion yen of bonds to fund the spending. Aso emphasized the importance of stimulus at a meeting of the leaders of the Group of 20 largest economies last week after chastising Germany for its reluctance to boost spending.
The package "will damage the already poor fiscal position, but tolerating extended deflation and recession would probably be worse," said Richard Jerram, a Tokyo-based economist at Macquarie Securities Ltd. It will give "a large stimulus to the domestic economy."
The yield on the benchmark 10-year bond climbed 3 basis points to 1.48 percent.
The government's ability to revive the economy is constrained by its debt, which is already the world's biggest and is likely to spiral to 197 percent of gross domestic product next year, according to the Organization for Economic Cooperation and Development.
‘Do or Die'
"This really is the do-or-die fiscal stimulus package," said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. "The reason Japan can do it is the cost of carrying government debt is so low at a moment."
Aso must call elections by September just as companies from Toyota Motor Corp. to Sony Corp. slash production and fire workers and the economy flirts with deflation.
Aso's approval rating, which fell below 10 percent less than two months ago, has rebounded as he prepares sanctions against North Korea after it launched a missile over Japan this week. He has also benefited from a drop in support for Ichiro Ozawa, leader of the opposition Democratic Party of Japan, whose top aide was charged with campaign-funding violations.
"The bigger-than-expected spending could provide a fair wind to Aso and help gain support from voters," said Susumu Kato, chief economist at Calyon Securities in Tokyo. "Given that Japan is in a deep recession, the government may need to compile another stimulus to keep boosting the economy."
Asian Stimulus
Asia's governments, excluding Japan, have unveiled more than $710 billion in increased spending, tax cuts and cash handouts and central banks around the region have slashed borrowing costs to kick-start consumer demand.
Japan's stimulus will focus on the job market, credit to companies, energy-efficient technology, support for regions and welfare, Finance Minister Kaoru Yosano said this week.
The LDP document, obtained from a party official, said 1 trillion yen of the funds would come from reserves and some from so-called special accounts. The rest may be funded by selling bonds, it said.
The proposal includes about 3 trillion yen in financial measures to help companies and about 1.9 trillion yen to support employment, according to the document. About 2 trillion yen will be spent on child care and education, and about 2.6 trillion yen is earmarked for roads and airports.
Gift Tax
The government will also increase the value of gifts that are tax deductible to 6.1 million yen from 1.1 million yen on condition the money be used to buy or repair housing. This measure is designed to help shift the 1,400 trillion yen in financial assets held mostly by Japan's older generation.
The package will be the largest ever for a single year, surpassing former Prime Minister Keizo Obuchi's 8.5 trillion yen stimulus during the Asian financial crisis in 1998.
The LDP's plan totals 56.8 trillion yen when financial initiatives such as funds set aside to help companies get access to funding, are included, according to the document.
Reports this week paint a mixed picture of the world's second-largest economy.
Japanese machinery orders unexpectedly rose for the first time in five months in February, a report showed today. Merchant sentiment surged to the highest since July, the Cabinet Office said yesterday, indicating factory production may recover in coming months, according to Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo.
Meanwhile, exports plunged a record 50.4 percent in February from a year earlier, the Finance Ministry said yesterday, and another survey showed bankruptcies rose to a six- year high in March. The Bank of Japan said the economy is deteriorating "significantly."
"One-shot spending for a single year may not be enough to bring Japan's economy back to a sustainable recovery," said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. "The government may need to spend more after the election."
