Japan Plans to Spend 2 Trillion Yen on Stimulus Plan

By Keiko Ujikane and Toru Fujioka

Aug. 29 (Bloomberg) -- Japanese Prime Minister Yasuo Fukuda, facing elections within a year, plans to spend about 2 trillion yen ($18 billion) to revive the world's second-largest economy.

Included will be 400 billion yen earmarked for a small and midsize company credit-guarantee program that would back about 9 trillion yen of loans, bringing the size of the package to 11.7 trillion yen, the government said in a statement in Tokyo today.

``Most of this is just padding from lending-related measures,'' said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. ``It looks as though the genuine spending-related components will be 1 trillion to 2 trillion yen spread over a year, which is insignificant.''

Fukuda's popularity has fallen by half since he became leader of the ruling Liberal Democratic Party last September, amid disputes with the opposition-controlled Upper House and after he re-imposed a tax on gasoline in May.

Economic and Fiscal Policy Minister Kaoru Yosano said the government won't issue new bonds to pay for the 2 trillion yen of spending, which also includes providing medical benefits for low- income elderly people and improving earthquake resistance of schools.

``The program earmarks 2 trillion yen in real spending, but probably barely half of it will contribute to boost GDP,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo. ``The government needs to provide steps to encourage spending by companies and households, but no such steps are in the package.''

Plan's Focus

``The emphasis of this plan is on helping out small and medium-sized companies, agriculture, the forestry and fishing industries and other enterprises affected by rising oil prices,'' Fukuda told reporters in Tokyo today.

Japan already has 778 trillion yen of outstanding debt, which at 147 percent of gross domestic product is the largest among industrialized nations. Yosano said the government is ``still on track'' to meet its goal of balancing the budget by 2011 to contain the debt.

Yosano said the government was also considering tax cuts for low-income earners, without specifying their scale or how they would be funded.

Debate over the package exposed divisions within the ruling coalition.

``The LDP had to compromise for a tax cut because they are afraid of losing New Komeito party support before an election within a year,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. ``These measures will probably push up the gross domestic product only by about 0.2 percent and that isn't much for the economy in a recession.''

Party Divisions

LDP Secretary General Taro Aso said the government should consider postponing its budget goal because the economy may be in a recession. The New Komeito Party, the junior coalition partner, advocated a bigger spending program.

In contrast, Yosano and Finance Minister Bunmei Ibuki, both of whom were appointed in a Cabinet reshuffle this month, stressed the need to maintain fiscal discipline.

The economy shrank an annualized 2.4 percent last quarter, the most since 2001, and the fastest inflation in a decade is eroding the spending power of consumers amid sluggish wage growth.

Last month Japan's 250,000 commercial fishermen staged the biggest strike of its kind demanding the government ease the cost of running their boats.

``Fukuda just wants to demonstrate to the public that he's trying to do something about the deteriorating economy,'' said Jiro Yamaguchi, political science professor at Hokkaido University in northern Japan. ``The countdown for a general election has started.''

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net