Tokyo: Japan will give details of new spending worth $100 billion or around 2% of GDP on Wednesday to stimulate an economy in recession, as a tumbling surplus showed the financial crisis taking a toll on exports.
The current account surplus halved in February from a year earlier as exports and earnings from overseas investments sank, highlighting problems facing an economy reliant on exports and foreign investment to make up for weak domestic demand.
The government, struggling with Japan’s worst recession since World War Two, is putting the final touches to its fourth economic package in the past year.
The new package will add around ¥10 trillion ($100 billion) to spending already planned under previously announced stimulus measures, doubling the total to around 4% of GDP.
Finance Minister Kaoru Yosano had said he hoped to announce details of the package on Wednesday, and ruling party officials said they agreed to decide on its outline by the end of the day.
Included will be the creation of a safety net for contract workers, measures to help corporate financing and increased spending on solar power systems, Yosano has said.
Many economists say fiscal spending is necessary to cushion the blow from a shrinking economy in light of a sharp contraction since October.
But some economists also warn that a ballooning public deficit could have consequences eventually.
“The economy is suffering because exports are falling in a weakening global economy. The problem is that if the government wants to make up for exports with deficit spending it will end up spending more,” said Seiya Nakajima, chief economist at Itochu Corp.
Worries over an increase in government debt have been weighing on the bond market, helping to push the yield on 10-year Japanese government bonds to a 4 1/2-month high earlier this week.
Prospects for fiscal spending by countries around the world have helped to lift Japan’s Nikkei average more than 20% from a low hit just over a month ago but wariness over earnings prompted profit-taking on Wednesday.
Japan’s service sector sentiment jumped to an eight-month high in March, as the government’s plan to hand out one-time payments to each individual boosted sentiment, while companies also reported progress in inventory adjustment.
The March survey of workers such as taxi drivers, hotel staff and restaurant staff - called “economy watchers” for their proximity to consumer and retail trends -- showed their confidence about current economic conditions at 28.4, up from 19.4 in February.
The reading, while below the 50 mark that separates optimism and pessimism, was the highest since July and also marked the second-biggest jump on record from the preceding month.
Ryota Sakagami, an economist at Nomura Securities, said the reading suggests a rebound in the economy as the survey tends to precede Japan’s industrial production trends by a few months.
“A rebound in April-June could be bigger than we’ve been expecting, even though we don’t expect a full-fledged recovery,” he said.
The Bank of Japan also said in its monthly report that a fall in exports and output will likely moderate, although that did not stop the BOJ from saying the economy will continue to deteriorate for the time being.
The government package will include plans to fund an incentive programme aimed at encouraging consumers to buy energy-efficient electronics, the Nikkei business daily said on Wednesday.
Also included will be a ¥37 trillion scheme to aid companies’ fund-raising by boosting various existing frameworks to support corporate finance, the Nikkei reported.
“The size of the government’s economic package will be large. But a lot of steps will be safety nets so that alone will be unlikely to galvanise domestic demand,” said Susumu Kato, chief economist at Calyon.
The Japanese economy shrank 3.1% in October-December from the previous quarter and is seen having shrunk a further 2.5% in January-March.
Japan’s contraction is bigger than those in other major economies, despite its banking system being among the least damaged by the credit crisis, because of its reliance on exports of cars and electronics.
Data on Wednesday showed Japan’s current account surplus fell 55.6% in February from a year earlier as exports wilted, with the financial crisis pummelling both Japan and its export destinations.
The income surplus shrank 34.1%, the biggest fall in nearly three years, as companies earned less from overseas securities and direct investment, the Ministry of Finance data showed.