The Japanese Government is preparing yet another massive stimulus package of about 7,000 billion yen (£48 billion) amid fears that economic recovery is anything but assured.
The stimulus package — effectively Japan’s third big cash deluge this year — was expected yesterday but deepening political divisions within the new ruling party scuppered the announcement. The size and scope of the stimulus are now scheduled to be made public on Monday, after what is likely to be a fraught weekend of negotiations.
The central disagreement appears to be over the size of the stimulus: the Prime Minister believes that Y7,000 billion will suffice, while his more radical coalition partners believe more will be needed.
Despite a number of signs of corporate recovery and cautious optimism on unemployment, Japan has sunk back into deflation and its companies remain painfully vulnerable to the yen’s strength against the US dollar.
However, Japanese stocks had their strongest week since 1992, with the Topix index recording combined gains of 9.7 per cent over the five sessions since Monday. Brokers ascribed the euphoria to the Bank of Japan’s moves to roll-out additional easing measures and a policy shift that now appears to favour exporters and a cheaper yen.
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The stimulus package as it stands would involve about Y4,000 billion of new fiscal spending. Measures will include environmental projects and efforts to promote earthquake-proofing of homes to stimulate the building market.
The remainder of the cash would be used to shore-up local government finances that have been hammered by the crash in tax receipts that began soon after the collapse of Lehman Brothers in September last year.
According to Nicholas Smith, a strategist at MF Global, the brokerage, the tax system remains Japan’s Achilles’ heel. Less than 30 per cent of Japanese companies booked a profit for tax purposes last year — a figure that implies either that the majority of the economy makes no money at all, or that corporate tax evasion is rife at all levels of business.
The failure to agree on the stimulus reveals disturbing weaknesses within the Government of Yukio Hatoyama. Despite the roaring success of his Democratic Party of Japan (DPJ) in the August general election, his power depends on an awkward coalition with the People’s New Party (PNP) — a small group of MPs led by the controversial former police chief, Shizuka Kamei.
His hold over Mr Hatoyama became clear soon after the election, when despite the DPJ’s enormous majority in the lower house, the Prime Minister was forced to make Mr Kamei his Financial Services Minister to retain the PNP’s handful of votes in the upper house.