Japan faces up to snail-paced growth with new stimulus

A new package would set Japan apart from the rest of the developed world, which is winding down stimulus steps even as worries grow about a cooling global economy.

GDP data this week showed Japan grew at just 0.4% at an annualised rate between April and June, down from 4.4% the previous quarter. As a result, the country lost its place to China as the world's second economy.

Renewing stimulus measures will be a tricky task for Prime Minister Naoto Kan, who is also juggling a promise to reduce the country's massive debt and a possible challenge for leadership of his Democratic Party next month.

Kan has asked his cabinet for ideas that limit new spending, suggesting tax and regulatory reforms as potential alternatives.

"Of course we have to consider fresh fiscal spending," he said today, but added that "it seems possible to boost demand or stimulate the economy without depending on fiscal spending".

Japan's finance minister indicated a cautious stance on taking on more debt, which is almost double the size of GDP.

"It is our mission to both stimulate the economy and restore public finances," Yoshihiko Noda said. "As for whether we need to issue new government bonds (to finance the stimulus), this is something we should determine while closely monitoring economic movements."

Kan wants to compile and approve new measures by the end of next month, according to the Nikkei financial daily. The government could tap into a reserve fund in this year's budget as well as a surplus from last year, which total 1.7 trillion yen, said Masaaki Kanno, chief economist at JPMorgan Securities Japan, in a report.

Japan posted solid growth numbers after emerging from recession last year. Robust demand in China and elsewhere in Asia have fuelled exports, production and corporate profits. The sudden deceleration in the second quarter, which stemmed from weak domestic demand, came as a surprise to economists and government officials.

Adding to woes is the yen, which hit a 15-year high against the dollar last week. While a strong Japanese currency boosts consumers' purchasing power, it poses a major risk to the country's exporters such as Toyota and Sony. When the yen climbs, the value of repatriated earnings fall.

The Nikkei reported today that the government's new stimulus package is likely to include measures aimed at helping job hunters find work and supporting small and medium-sized businesses. It may also incorporate subsidies for green technology companies.

Kyohei Morita, chief economist at Barclays Capital in Tokyo, said the government also needs to consider cutting corporate taxes and extend its "eco-point" programme for energy efficient appliances, set to expire in December.