Gross domestic product data earlier this week showed Japan grew at an annualized rate of just 0.4 percent in the April-June period, down from 4.4 percent the previous quarter. As a result, the country lost its place to China as the world’s No. 2 economy.
But it will be a tricky task for Prime Minister Naoto Kan, who is also juggling a promise to reduce the country’s massive debt and a possible challenge for leadership of the Democratic Party next month.
Kan has asked his Cabinet for ideas that limit new spending, suggesting tax and regulatory reforms as potential alternatives.
“Of course we have to consider fresh fiscal spending,” Kan told reporters, according to Kyodo news agency. But “it seems possible to boost demand or stimulate the economy without depending on fiscal spending.” Separately, the country’s finance minister indicated a cautious stance on taking on more debt, which is almost double the size of GDP.
“It is our mission to both stimulate the economy and restore public finances,” Finance Minister Yoshihiko Noda said. “As for whether we need to issue new government bonds (to finance the stimulus), this is something we should determine while closely monitoring economic movements.” Kan is aiming to compile and approve new measures by the end of September, according to the Nikkei financial daily.
The government could tap into a reserve fund in this year’s budget as well as a surplus from last year, which total 1.7 trillion yen ($20 billion), said Masaaki Kanno, chief economist at JPMorgan Securities Japan, in a report.
Japan had posted solid growth numbers since emerging from recession last year. Robust demand in China and elsewhere in Asia have fueled exports, production and corporate profits. The sudden deceleration in the second quarter, which stemmed from weak domestic demand, came as an unnerving surprise to economists and government officials.
Adding to woes is the yen, which hit a 15-year-high against the dollar last week. While a strong Japanese currency boosts consumers’ purchasing power, it poses a major risk to the country’s exporters such as Toyota Motor Corp. and Sony Corp. When the yen climbs, the value of repatriated earnings fall.
The Nikkei reported Friday the government’s new stimulus package is likely to include measures aimed at helping job hunters find work and supporting small and midsize businesses. It may also incorporate subsidies for green technology companies.
Kyohei Morita, chief economist at Barclays Capital in Tokyo, said the government also needs to consider cutting corporate taxes and extend its “eco-point” program for energy efficient appliances, set to expire in December.
