Saturday, Oct. 9, 2010

By KANAKO TAKAHARA

Staff writer

The Cabinet of Prime Minister Naoto Kan endorsed a ¥5.05 trillion stimulus package Friday aimed at propping up an economy hampered by deflation and the surging yen.

The stimulus package is projected to add about 0.6 percent to economic output and create or retain 450,000 to 500,000 jobs. The government will draft a supplementary budget to finance the package and submit it to the Diet by the end of this month.

The ruling Democratic Party of Japan initially proposed a ¥4.8 trillion package but decided to hike it by ¥250 billion at the last minute due to strong pressure from coalition partner Kokumin Shinto (People's New Party).

The Social Democratic Party and New Party Nippon, both minor opposition parties, agreed to support the package after Kokumin Shinto reached out to them.

But as the ruling bloc lacks a majority in the Upper House, attention is now focused on whether the opposition's Liberal Democratic Party and New Komeito will also back the extra budget and ensure it smooth Diet passage.

Although New Komeito is expected to lend its support, party leader Natsuo Yamaguchi said Friday a decision will only be made after details of the package are unveiled. The LDP, meanwhile, plans to decide after considering how many of its proposals were included in the budget.

The government said it will not issue new bonds to finance the package. Instead, it will rely largely on a ¥2.2 trillion increase in tax revenues.

"The government (endorsed the stimulus) right after the Bank of Japan eased its monetary policy," said Banri Kaieda, state minister in charge of economic and fiscal policy. "We will act swiftly."

The BOJ on Tuesday cut its key interest rate effectively to zero and decided to set up a fund to buy government bonds and other securities.

The planned stimulus is the second in a series of emergency steps intended to keep the economy on a recovery track, following the ¥918 billion package approved by the Cabinet last month.

But Hiromichi Shirakawa, chief economist at Credit Suisse, said he is doubtful the stimulus package will have a quick impact on an economy facing downside risks.

"The decline in consumption seemed to be huge after the subsidy for eco-friendly cars ended in early September," Shirakawa said. "The economy is likely to continue declining until around February. I don't think this measure can reverse the trend."

Shirakawa said the government should use its financial resources wisely and prioritize projects, criticizing the stimulus package as simply a list of measures each ministry has drawn up.

Of the ¥5.05 trillion, ¥3.1 trillion is earmarked for boosting local economies, supporting small and midsize businesses and building infrastructure, while ¥1.1 trillion is allocated for welfare and child-rearing measures.

The package also includes an unspecified amount for securing rare earth elements, after China placed a de facto embargo on exports of such minerals to Japan amid a diplomatic spat over the Senkaku islets.

Upgrading the Japan Coast Guard fleet was also budgeted for in the stimulus.

Although the DPJ draft submitted to the government earlier this week proposed the creation of a sovereign wealth fund, this clause was deleted from the final version.

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