Page last updated at 10:49 GMT, Tuesday, 8 December 2009

Japan agrees $81bn stimulus package

Shoppers in Tokyo
Japan wants consumers to start spending more

Japan has agreed a 7.2 trillion yen ($81bn; £48bn) stimulus plan designed to prevent the country's economy from slipping back into recession.

Japan's economy grew for the second straight quarter between July and September, but the return of deflation has sparked fears growth could stall.

The strong yen is also holding back Japanese exporters.

The stimulus was due to be announced last Friday but was delayed after disagreements over its size.

This is the first major economic stimulus announcement by the newly elected Democratic Party of Japan.

The previous government unveiled a 15.4tn yen package in April this year.

'Fundamental issues'

"We must present an economic package promptly in order to make the economic recovery solid in the face of the current severe economic and employment situation, the yen's rise and deflation," the government said.

Japan's economic recovery is unlikely to be sustained because the planned domestic stimulus package will likely prove ineffective
Seiji Shiraishi, HSBC

"We will do our utmost to regain Japan's vigour."

The package includes measures to bolster employment, extend incentives for energy efficient products, and provide loan guarantees to help small and medium-sized businesses.

However, analysts were sceptical about the impact the package would have.

"This may help the economy somewhat, but it doesn't even begin to address the more fundamental issues facing Japan, such as weakness in the global economy and deflation," said Yasunari Ueno at Mizuho Securities.

Japan's economy is driven by exports, and measures targeting domestic consumers would enjoy limited success, analysts argued.

"Japan's economic recovery is led by overseas government stimulus but is unlikely to be sustained because the planned domestic stimulus package will likely prove ineffective," said Seiji Shiraishi at HSBC.

The yen recently hit a 14-year high against the dollar, making Japanese exports more expensive in the US.

'The lost decade'

After four consecutive quarters of contraction, Japan finally emerged from recession earlier this year when the economy grew by 0.9% in the April-to-June quarter. It then grew by 1.2% between July and September.

But the return of deflation for the first time since 2006 has dampened confidence. Deflation means falling prices, which are bad for an economy as consumers hold off from spending, as they know they can buy the same goods for less in the future.

Japan has a history of struggling with deflation. The 1990s are often referred to as Japan's "lost decade" because of its 10-year struggle with falling prices.

It followed a collapse in prices in the housing market and the stock market at the end of the 1980s.

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New York Times Japans Leader Promotes $81 Billion Stimulus Plan - 1 hr ago Japan lays on the cash - 2 hrs ago Japan cut 3Q GDP growth estimate to 1.3%(update) - 2 hrs ago
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