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Japan plans new economic stimulus

Japan's government and the central bank threw the economy a double lifeline Monday, seeking to contain a strong yen and revive a faltering recovery.
/ Source: The Associated Press

Japan's government and the central bank threw the economy a double lifeline Monday, seeking to contain a strong yen and revive a faltering recovery.

To boost liquidity, the central bank unveiled a new six-month low-interest loan program to financial institutions. Combined with an existing three-month funds-supplying operation worth 20 trillion yen ($236 billion), banks will now have access to a total of 30 trillion yen ($355 billion).

The 8-1 decision by the central bank's policy board was accompanied by an unanimous vote to keep its key interest rate at a super-low 0.1 percent.

"With this, the bank will encourage a decline in market interest rates and further enhance easy monetary conditions," Bank of Japan Gov. Masaaki Shirakawa told reporters.

The central bank's move, which disappointed investors and analysts hoping for bolder action, was followed several hours later by Prime Minister Naoto Kan's plans for a new economic stimulus package worth 920 billion yen ($10.9 billion). Those steps were also criticized as inadequate.

Japan's export-driven economy faces mounting uncertainty due to the strong yen, which hit a 15-year-high last week, and slowing global growth. Sustained strength in the yen is toxic to vital exporters such as Toyota Motor Corp. and Sony Corp. because it erodes their international profits and makes their goods less competitive abroad.

Japan lost its place to China as the world's second-largest economy after posting annualized growth of just 0.4 percent in the second quarter.

The new stimulus package includes more help for jobseekers, such as enhanced career counseling at universities and an internship program for new graduates. To bolster consumption, the government hopes to extend incentives including a popular "eco-point" program aimed at encouraging purchases of energy-efficient home appliances. Kan also wants to establish a committee of high-level public and private-sector officials to help the country adopt new growth strategies.

Kan will tap into reserve funds from this year's budget. Specific details of the steps and their approval are expected Sept. 10.

But financial markets were underwhelmed by the central bank's decision, and economists question the effectiveness of the government's stimulus.

The yen weakened and the Nikkei 225 stock average rose more than 3 percent following news of the emergency meeting. Both reversed course after the central bank's announcement. The Nikkei pared gains to finish up 1.8 percent at 9,149.26, and the yen strengthened to 85.12 to the dollar.

Richard Jerram, head of Asian economics at Macquarie Securities, described the Bank of Japan's decision as a "helpless, hopeless policy." The government's modest stimulus appears similarly pointless, he said.

"There seems to be a sense of fatalism," Jerram said in a report Monday. "The BOJ continues to play the same old game of making incremental, but ultimately meaningless policy change, in response to political pressure."

The central bank maintained its broader stance on the economy, saying it is showing signs of a "moderate recovery." But it cited mounting worries about the U.S. economy and volatility in foreign exchange and stock markets for its latest step.

On Friday, Federal Reserve Chairman Ben Bernanke said the Fed was ready to step in if the U.S. economy showed further signs of weakening. He said in a speech at the Fed's annual conference in Wyoming that the central bank remains ready to take extra steps to stimulate the economy if necessary, such as buying more debt securities in order to keep interest rates low.

Shirakawa, who cut short his trip to Wyoming, said there is no major divide between the views of the government and Bank of Japan.

"The bank believes that the monetary easing measure, together with the government's efforts, will be effective in further ensuring Japan's economy recovery," he said.

Kan faces a greater sense of urgency as he looks to consolidate support two weeks ahead of an interparty election to select its president. Party veteran Ichiro Ozawa is challenging Kan in the Democratic Party's Sept. 14 election. The lawmaker chosen as party ruler is almost certain to become prime minister.

Initial indications about the government's stimulus package suggest that it too may be disappointing.

The business daily Nikkei reported in its evening edition that measures included extending low interest rates for home buyers and increasing the number of job counselors for high school and college graduates.

Economists, who predicted the central bank's decision, say there may be more to come.

"If the economic outlook and market conditions get worse, the BOJ will likely announce some additional easing measures," said Masaaki Kanno, chief economist at JPMorgan Securities Japan, in a note to clients.

The central bank's next scheduled board meeting begins Sept. 6.