washingtonpost.com
Massive Stimulus Packages Add to Japan's Pile of Debt
Spending Plans Balloon to $270 Billion, Mostly Borrowed

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.

Keeping Debt at Home

There is also a broad consensus among economists that the Japanese government can borrow the money it needs -- at rock-bottom interest rates -- without needing to look abroad. It can tap cash-rich pension funds, insurance companies, banks and private savings.

"The debt is going to be big, but it is all coming from inside Japan," said Edwin Merner, president of Atlantis Investment Research in Tokyo. "And Japan is full of savings. You don't have a situation like in the United States where everyone is leveraged up and you have to borrow money from abroad."

As details of the government's plan trickled out this week, there were also solid signs that the decline in exports may be nearing a bottom.

Orders for machinery, an indicator of companies' plans for future spending, defied dismal forecasts and rose 1.4 percent in February, the first increase in five months.

When the global economic crisis began last fall, the yen rose sharply against the dollar, making Japanese exports more expensive at exactly the time when demand for them was disappearing. The value of the yen has moderated in recent weeks, falling about 10 percent, making Japanese exports more attractive.

Many Asian currencies undercut by the downturn are now gaining strength. Indonesia's rupiah and India's rupee have made gains against the dollar for five consecutive weeks as investors slowly gain confidence that policy actions to combat the global recession are having some effect. South Korea's won has risen roughly 14 percent against the dollar over the past month.

Still, economies across Asia remain fragile. In a sign of the continuing weakness in Japan, for example, one of its biggest banks said Friday that it expects to post a net loss of $3.9 billion for the last fiscal year, after having predicted a profit. Like banks worldwide, Sumitomo Mitsui Financial Group has suffered from bad loans; it announced it may soon issue new shares to raise as much as $8 billion in capital in an effort to restore its balance sheet.

Special correspondent Akiko Yamamoto contributed.

View all comments that have been posted about this article.

© 2009 The Washington Post Company