Japan's cabinet today approved an extra budget to cover a new stimulus package worth about $63 billion to avert the threat of a 'double-dip recession' as deflation and a strong yen bite.
The package, which amounts to around five trillion yen, will be financed by the extra budget, whose fate now depends on whether Prime Minister Naoto Kan's ruling party can pass it in parliament where it lacks a clear majority.
The stimulus will be the government's second since it came to power in June and includes job programmes, welfare spending and schemes for small businesses and infrastructure.
It also includes an 87.2-billion-yen provision to find new supplies of strategic materials including rare earth minerals used in high-tech components for cars and computers. Japan, which relies on China for the vast majority of its rare earth mineral supply, last month said Beijing had disrupted the crucial shipments following a territorial dispute between the two Asian giants.
Kan came to power promising to slash spending and work towards cutting the world's biggest industrialised debt, at 200% of gross domestic product, and has vowed not to issue new debt to pay for the new stimulus measures.
But Japan's malaise has complicated Kan's ambitions. Export growth is slowing, crippling deflation persists and last week the government downgraded its view of the economy for the first time since February 2009.
The Japanese currency yesterday hit a 15-year high against the dollar at 80.41 yen, its strength hammering the competitiveness of the crucial export sector, which is already hit by slowing overseas demand.
The government in September approved a 915-billion-yen stimulus package financed by reserve funds to create around 200,000 jobs and lift the country's GDP by about 0.3%, but that was criticised as insufficient.
The strong yen has hurt Japan's exporters, making their goods more expensive and eroding overseas profits when repatriated. A strong currency also makes imports cheaper, helping to prolong a damaging deflationary cycle where consumers hold off on purchases in the hope of further price drops, clouding future corporate investment.
Japan has reduced its official interest rate to almost zero and last month intervened in the foreign exchange market for the first time in six years to sell the surging yen. But the moves failed to halt the Japanese currency's ascent.
