Emergency Stimulus Considered for Japan

September 9, 2002

Japan's economic council, the main policy instrument of Junichiro Koizumi, the prime minister, will on Monday consider whether to adopt emergency measures to stimulate the flagging economy and lift sinking share prices.

Members of the ruling coalition are expected to urge the council to adopt measures including hefty tax cuts, the direct purchase of shares by the government and greater flexibility in the state's purchase of bad loans from struggling banks.

Heizo Takenaka, economy minister, who cut short a visit to Italy to take part in Monday's debate, said on television on Sunday that tax cuts of at least Y2,500bn ($21bn) should be considered, more than double the amount previously flagged.

The renewed sense of urgency comes after the Nikkei share average slipped towards 9,000 last week, its lowest level in nearly two decades, putting pressure on life insurance companies and banks, which hold much of their capital in equities. Banks must close their books for half-year reporting at the end of this month, an exercise that could expose capital adequacy ratios below international requirements.

Economic news has also been disheartening, with recently revised gross domestic product figures showing the economy actually shrank slightly in the first quarter, rather than growing strongly as originally thought.

But people close to Mr Koizumi played down suggestions that the prime minister, who has staked his reputation on improving Japan's fiscal position, would be jolted into adopting knee-jerk stimulus measures.

"Mr Koizumi will carry on with structural reform and we won't jump up and down just because of fluctuating stock prices," said Misako Kaji, deputy press secretary to the prime minister. "The government has not reached a conclusion as to whether it should come up with a new package."

Ms Kaji was particularly cool on the idea of the government buying shares to prop up the stock market, in spite of weekend press reports that the prime minister had agreed to allow state pension funds to buy shares to the tune of Y3,000bn. "Mr Koizumi's idea is to leave these things up to the market. That's what his reform is all about."

The sense of urgency could improve the case of economic council members who have been pushing for big tax cuts to help stimulate the economy, even though many experts argue that these would have a very limited impact. The council has been advocating across-the-board corporate tax cuts against the advice of the government's tax commission, which wants to focus incentives on R&D-intensive industries.

Hiromitsu Ishi, chairman of the tax commission, has been persuaded to countenance tax reductions, even though he has argued that such measures have consistently failed to revive the economy over the past decade. But such is the political momentum building for cuts that even Mr Ishi, who is strongly urging medium-term tax increases, said a short-term cut of Y2,000bn was now a credible option. "This is really a political compromise," he said. "So I'm not so concerned."

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=
StoryFT&cid=1031119144481&p=1012571727102