Japan announces multi billion stimulus drive

Updated August 31, 2010 13:03:22

The Japanese government has announced plans for a stimulus package worth around US$11 billion on the same day that the central bank decided to keep interest rates at a tiny 0.1 per cent.

Both measures are seen as moves to curb the rise of a strong yen, which is threatening the country's fragile economic recovery. The Bank of Japan held an emergency policy meeting. But with little room to move, it's opted to hold tight, and even expand its cheap loans to banks.

Presenter: Karon Snowdon, finance correspondent
Speaker: Robert Rennie, chief currency strategist, Westpac Bank, Shijiro Ogata, former deputy governor, international relations, Bank of Japan

SNOWDON: Some commentators are saying in effect the Bank of Japan is fiddling while Tokyo burns.

But how do you get commercial banks to lend money to businesses reluctant to borrow?

And, then, how to get consumers to buy the goods they produce.

That's the problem facing Japan - the economy is stagnating with consumers leaving their money firmly in their wallets - why buy now when everything will be cheaper tomorrow?

It's a big enough problem for the government to recall the head of the central bank a day early from a trip to the United States for an emergency meeting.

RENNIE: You don't call your central bank governor back to instigate an emergency meeting if you think all they're really going to do is increase the size of their stationary bill each month.

SNOWDON: Westpac Bank's chief currency strategist, Robert Rennie.

RENNIE: Markets get very excited about the fact that the BOJ was essentially being forced - [perhaps that is] too aggressive a word for it - but prodded into the idea that they needed to do more. If that was the case it certainly doesn't seem to have developed into any significant moves on the part of the BOJ.

SNOWDON: Deflation - the curse of Japan through the 1990s is on the way back. Consumer prices have fallen for the 17th month in a row.

Now, with the yen reaching a 15 year high last week, exporters will see their profits fall and the economy will feel the effects.

Westpac's Robert Rennie says the Bank of Japan, the BOJ, has not been doing enough for some time.

And today - an increase in the money supply through another US$120 billion in cheap loans to banks is a token gesture.

RENNIE: Essentially the foreign exchange market is getting a clearer sense of desperation within the Japanese economy, and desperation within the Japanese authorities, that it's almost pushing the Japanese authorities to act. If they hadn't done so, I think the BOJ would have been happy to sit here and carry on and do very little.

SNOWDON: In contrast, US central bank governor Ben Bernanke said on the weekend the Fed would be prepared to take 'unconventional' steps to boost growth if the economic outlook deteriorated.

But prime minister Naoto Kan is struggling to keep his post against a challenge to his leadership of the ruling party.

And with public debt twice the size of the economy his options are limited.

Former deputy governor for international relations at the Bank of Japan, Shijiro Ogata, notes that political stability is an essential first step.

OGATA: Countries outside Japan, I am afraid, may look at Japan as a very politically fragile country on the top of the rather weak economy. And, of course, I am hoping through a little bit of confused process, a kind of sign of political stability should be established. That is probably the important step before any further economic policy actions to be taken.

SNOWDON: And Robert Rennie says there's simply too much focus on the yen.

RENNIE: The one big issue is the real purchasing power of the yen, essentially, it is being whittled away by year after year of unchecked deflation. The yen is not really so strong. In fact, it's about the average levels that we've seen in the past 15 or 20 years. And I sense that the BOJ is probably looking at the situation, throwing up its hands and saying 'what can we do?' There's almost a sense of desperation in the BOJ's statement.