Japanese Stimulus Adds to Debt

By Blaine Harden
Washington Post Foreign Service
Saturday, April 11, 2009

TOKYO, April 10 -- Japan, which soothed the pain of its ruptured bubble economy in the 1990s with massive government borrowing, is again swallowing giant doses of deficit medicine.

To recover from a global downtown that has hurt Japan more than any industrialized nation, Prime Minister Taro Aso announced on Friday his third and largest stimulus package since coming to power last September. At a cost of $150 billion, it brings the total amount of new spending to $270 billion, about 5 percent of Japan's gross domestic product.

"Our prime objective is to prevent the economy from falling through the floor," Aso said.

Most of the stimulus packages will be paid for with borrowed money, increasing Japan's mountain of public debt and forcing the government to raise taxes when the economy recovers. At about 170 percent of GDP, the country's debt is the highest among wealthy countries.

Stock markets in Japan and across Asia welcomed the stimulus package, details of which have dribbled out in recent days, with big gains this week. Many market analysts agreed with Aso that the severity of the recession gave the government no choice but to roll out more spending.

"We are in the midst of economic crisis," Aso said. "Japan's exports and production are rapidly deteriorating."

A Staggering Contraction

The world's second-largest economy shrank an alarming 12.1 percent on an annualized basis in the fourth quarter of 2008, a contraction that was twice as severe as that of the United States. Japan's economy probably fared even worse in the first quarter of this year, government officials say.

Among independent economists, the most common complaint about the stimulus package announced Friday was that it was much too late. The extraordinary scale of Japan's problems became clear in September, when exports of Japanese cars and electronics collapsed.

Still, Aso's latest spending plan got good marks from economists, in part, because of where the money is going.

"It is a pretty good program, but it should have come five months ago," said Akira Kojima, of the Japan Center for Economic Research.

Instead of huge spending on questionable infrastructure projects, as occurred in the 1990s, the plan would create a safety net for "nonregular" workers, the first to be laid off in the recession. It would also improve medical services, promote solar-powered industries and help strapped small businesses.

"Spending on the unemployed, especially for retraining, would be the best and fastest way to help the economy recover," said Takatoshi Ito, a professor of economics at the University of Tokyo.

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