Leaders of Japan's ruling coalition are preparing to administer a fresh injection of spending increases and tax cuts to sustain the recovery of their nation's still-shaky economy. Now comes the tricky part: figuring out the proper dosage.
In announcing formation of his new cabinet Tuesday, Prime Minister Keizo Obuchi, leader of Japan's dominant Liberal Democratic Party, promised speedy agreement on a package of measures to stimulate economic growth. Many observers believe final decisions on the cabinet's supplementary budget proposal could come as early as Oct. 20.
So far, though, there's no consensus about the crucial question of how large the package should be. Several top LDP leaders have hinted recently that the supplementary budget could include as much as $123 billion worth of new stimulus measures, including at least $33 billion in increased spending for public works.
But many private economists warn such numbers are far below what's needed, given that Japan's other potential engines of growth--domestic consumption, exports and business investment--appear to be sputtering. Japan will need at least $47 billion in real spending increases or tax cuts to keep the recovery here on track, argues Robert Feldman, an economist at Morgan Stanley Dean Witter in Tokyo. "Anything less than that would be a negative for my [economic] forecast," he said.
The debate about new public spending for Japan's economy has taken on particular urgency in the aftermath of a high-profile meeting in Washington earlier this month at which finance ministers from the seven major industrial countries issued a joint statement hinting at their possible willingness to help reverse the strength of the Japanese currency. The idea was to shore up the Japanese economy; a strong yen pushes up the price of Japanese exports.
But the joint statement now rings hollow because Japan's central bank--without which any effort to drive down the value of the yen is doomed--has made it clear it is unwilling to lower interest rates or expand the money supply to bolster growth.
The danger for Obuchi and his LDP colleagues as they thrash out specifics of a support plan over the next two weeks is that they will repeat policy blunders that forced the resignation of Obuchi's predecessor, Ryutaro Hashimoto. In 1997, at the urging of Finance Ministry officials who misread a temporary improvement in the nation's gross domestic product as evidence of a permanent recovery, Hashimoto agreed to roll back public works spending and rammed through a controversial increase in the consumption tax. The result was a swift deterioration in consumer sentiment and the worst recession in Japan's postwar history.
During Obuchi's tenure, the government has sought to revive the economy by pumping billions of dollars worth of public spending into the economy. The spending ensured positive growth in the most recent quarter. But it also pushed the government's budget deficit to nearly 10 percent of GDP and added to Japan's already staggering national debt.
"Japan today makes Italy look like a fiscal paragon," said Kenneth S. Courtis, chief economist at Deutsche Bank Group in Tokyo, who calculates that total Japanese government debt now exceeds 120 percent of GDP.
The prospect of such an enormous debt burden is anathema to senior members of Finance Ministry's budget bureau--as well as many politicians. Indeed, Finance Minister Kiichi Miyazawa suggested Wednesday that Japanese leaders would have to raise taxes again before too much longer.
Such comments notwithstanding, Russell Jones, chief economist at Lehman Brothers Holdings Inc. in Tokyo, predicts that coalition leaders will err on the side of too much stimulus. Concerns about running up too much debt in the next century, he argues, will pale beside the desire to prop up the economy until next summer, when Obuchi is expected to call elections for the lower house of parliament.
"This is a very political business cycle now," Jones said. "My sense is that LDP leaders are willing to do whatever it takes to make sure the economy is performing well by election day."
CAPTION: Prime Minister Keizo Obuchi announced the formation of his new cabinet on Tuesday.