Japan sets extra budget

Japan's finance minister says reform is safe

The Japanese government has settled on a supplementary budget to kickstart its limping economy.

The decision to spend an additional 2,000bn yen ($16.6bn) in the current financial year casts doubt on whether austerity measures to tackle deep-seated economic problems will be implemented, analysts say.

Announcing the extra money, Japanese finance minister Masajuro Shiokawa pledged that a ceiling on government borrowing would not be breached despite a shortfall in tax revenues caused by the economic slowdown.

The government will cut its growth forecast for the current year to March 2002 when it completes drafting the extra budget later this month, said economics minister Heizo Takenaka.

Spending riddle

How the government will find its way out of this conundrum remains unclear.

In August, prime minister Junichiro Koizumi - who had promised reforms - set a budget which slashed public spending for the first time in four years.

He promised to rein in expenditure on public works projects which had been used to sustain loss making firms, particularly in the construction sector.

At 5%, unemployment is already at its highest level since the late 1940s.

No return to old ways

The finance minister vowed the extra 2,000bn yen would not be used to reinvigorate such projects. Instead, he said, it would be targeted at key areas such as IT and labour market reform.

Fears that Japan's already stagnant economy would slow further have gained ground since the 11 September terrorist attacks on America, restricting the government's room for manoeuvre.

Bank of Japan governor Masuru Hayami called for vigilance against recession on Monday.

Recession fears

"We are at a stage where we must with utmost care watch that Japan's economy does not fall into a vicious cycle of falling prices and economic recession," he said.

The Finance Ministry has said tax revenues will miss official targets of 50.7bn yen for the year to March 2002 because corporate profits are shrinking.

Mr Shiokawa predicted the revenue shortfall could be about 1,000bn yen, speaking as he set the supplementary budget at 2,000bn yen.

He added that he personally promised prime minister Koizumi the ministry would "limit the issuance of new government bonds" to within the 3,000bn yen.

That borrowing target formed the centrepiece of Mr Koizumi's budget.

Industrial output figures for August provided a hopeful indication for Japan's economy, rising 0.8% in August, the first increase for six months.