Japan to Spend $85 Billion to Spur Economy

Under pressure to provide a strong jolt to a sluggish economy, the Japanese Cabinet on Friday adopted an $85-billion stimulus package, its largest program of public spending ever.

The package, which includes tax cuts to spur corporate investment, debt relief for banks and public works spending, was designed to boost domestic demand and restore confidence in an economic system shaken in recent months by plummeting land and stock prices and reports of banks struggling with billions of dollars of bad loans.

The announcement had the immediate effect of giving the lagging stock market another strong kick. Advance news of the package ignited a wave of buying that has driven the Tokyo Stock Exchange’s Nikkei index up by 25% over the past 10 days from six-year lows that had put Japan’s economic bureaucrats in a sweat. On Friday, the key 225-share Nikkei average jumped 415.79 points, or 2.37%, to end at 17,970.79--its highest closing level since June 3.

The plan also found favor in Washington, where Treasury Secretary Nicholas F. Brady said the package should help the world economy.

“The early implementation of this comprehensive program can make an important contribution to increasing world growth and strengthening economic recovery,” Brady said in a statement.

The United States has been pressing Japan to boost its domestic economy to aid U.S. exports and reduce the U.S. trade deficit with Japan.

The government of Prime Minister Kiichi Miyazawa outlined a proposal for government intervention in the spring and revealed parts of the program Aug. 18. But the size of the package was substantially boosted at the eleventh hour to increase its impact, said Yoshiro Mori, chairman of the Policy Research Council of the ruling Liberal Democratic Party.

“If the unprecedented situation is not addressed, it will have a grave effect on the people’s standard of living and make it difficult for Japan to play its international role,” the ruling party said in a statement.

The government estimated that the measures will boost economic growth by about 2.4% over the next 12 months. That would produce a growth level near the 3.5% that Miyazawa promised President Bush during Bush’s visit to Tokyo in January. The economy is now growing at a rate under 2%.

Some economists said the package addresses both cyclical and fundamental problems with the economy and should provide a boost in the long term, but that signs of a rebound may not be evident for a half a year or more.

Other economists said the Ministry of Finance was exaggerating the importance of the bailout measures.

“There are a lot of mirrors being used here,” said Jesper Koll, economist at the Tokyo office of brokerage house S.G. Warburg. The real money actually being injected into the economy as a result of the package is far less than the $85 billion advertised, he said, estimating that the package will boost economic growth by only about 1% by March 31, the end of Japan’s fiscal year.

Still, the recent revival of the stock market gives banks more breathing room. Since banks own large amounts of equities that are partially counted as capital, the 60% decline in stock prices over the past 2 1/2 years has cut their ability to increase lending and contributed to the slowdown in the economy.

The absence of growth in bank lending has also depressed real estate prices. Land prices fell an average of 5.7% last year, and 30% to 40% below peak levels in big cities like Tokyo and Osaka, according to a report this summer by the National Land Agency. Although the government once sought aggressively to lower real estate prices as part of its social policy to make housing more affordable, it has now reversed that policy because of the damage to bank assets.

The core component of the economic bailout is a plan to add $55 billion in new public spending for roads, sewage systems, public research facilities and other infrastructure projects.

The plan also includes $6.4 billion for subsidized housing loans, $12.5 billion to help finance the acquisition of land for public projects and $17 billion for additional subsidized loans to encourage investment in labor and energy-saving machinery, particularly by small and medium-sized businesses. Some of the loan allocations may be in the form of guarantees rather than actual expenditures.

The apparent investor euphoria over the plan could turn to gloom if the economic outlook doesn’t improve soon.

Seeming to confirm views that an economic rebound may be slow in coming, Nissan Motor Co. on Friday projected its first loss ever--$120 million for the year that ends March 31--primarily as a result of weak demand for cars in Japan. The company said it would cut 4,000 jobs over three years.

“Eventually people are going to sell shares again when they see how bad earnings are,” said Tetsuo Tsukimura, who estimated corporate earnings will fall an average of 40% this year. Tsukimura remains bearish on the Japanese economy, predicting that it will actually shrink by 2% in the year to March 31 in spite of the large spending package.

He predicted that public borrowing to finance the package will crowd out private borrowing and lead to higher long-term interest rates.

Tsukimura said that while officially unemployment is still 2%, there is a great deal of “hidden” unemployment by companies keeping unnecessary workers on their payrolls. An extended slowdown could see a sharp increase in unemployment levels, he said.

Although the government has managed to engineer an abrupt change in investor psychology in the stock market, it will have far more trouble trying to revive the real estate market. Banks are finding it difficult to unload land they acquired by foreclosing on bad loans, said Kazuo Sato, a senior executive at Mitsui Real Estate.

If the banks want to clean up their books, suggested Sato, they should sell their prime real estate, such as their headquarters buildings, rather than trying to unload land for which there is no demand.

Nevertheless, by putting a floor under the economy and restoring public confidence in the government’s economic management, the Ministry of Finance may have averted a financial crisis.

“Starting from today, this package will have a positive impact on the mind,” said one senior official from the Ministry of Finance.