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Sunday, August 8, 1999 Published at 11:26 GMT 12:26 UK

Business: The Economy

Japan needs $88bn to aid recovery

Tax cuts have failed to get Japanese people spending again

Japan needs to stimulate the economy with an $88bn budget to ensure its recovery, according to a government minister.

The head of the economic planning agency, Taichi Sakaiya, said the economy would worsen without a stimulus budget later this year.

[ image: Taichi Sakaiya: Economy will worsen without new budget]
Taichi Sakaiya: Economy will worsen without new budget
"Negative figures are expected in the April-June quarter compared with the January-March quarter," said Mr Sakaiya.

"Public works will decline in the January-March and April-June quarters next year. We have to make up for that period."

He said the scale of the budget would have to be nearly 10 trillion yen ($88bn).

After five quarters of negative growth, Japan surprised observers with a 1.9% increase in gross domestic product for the first quarter of this year.

Mixed economic data

But it now seems that that growth might not be sustained. The mixed data coming out of Japan - industrial output is rising, but consumer spending is down - illustrate just how fragile the recovery is.

But the big problem at the moment is unemployment. A record 3.29m people are now out of work, an increase of 450,000 from last year.

[ image: Unemployment is now the key issue for Prime Minister Obuchi]
Unemployment is now the key issue for Prime Minister Obuchi
It is that which is preoccupying Prime Minister Keizo Obuchi, who must call a general election in the next 14 months.

Last month the government passed a supplementary budget of 540bn yen ($4.8bn) aimed at creating 700,000 new jobs.

However, the latest jobless figures prompted talk of another stimulus package - the fifth in two years. Mr Sakaiya's assessment of the size of the budget indicates the depths of Japan's problems.

In 1998, Tokyo produced two huge budgets worth a combined 40 trillion yen ($350bn), pushing through massive public works programmes and bringing in temporary tax cuts to encourage consumer spending.

But there might be a limit to how much Japan can keep spending, as government debt already exceeds 100% of GDP.

Options are limited

Raising funds on the capital markets could threaten to push up the yield on Japanese government bonds, driving long-term interest rates higher and negating the stimulus from the higher spending.

The alternatives are also limited. With interest rates already close to zero, there is little scope to use monetary policy.

The radical option of reflation, then, looks more of a possibility, with the Bank of Japan printing money to boost demand in the economy.

So far, it has resisted government pressure to do so, but if a budget of the scale described by Mr Sakaiya does not produce the right results, there could be little choice.

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