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Japanese Stimulus Package Wins OK

Asia: Planning czar vows $196-billion plan will turn the tide. But many observers are skeptical.


TOKYO — After numerous failures, Japan's economic planning czar promised that the $196-billion mother-of-all stimulus packages approved by the Cabinet on Monday will create a million new jobs and finally end Japan's "vicious cycles of recession."

The larger-than-expected package of public works projects, tax cuts and loans was pushed through in time to show President Clinton, who arrives later this week for talks with Prime Minister Keizo Obuchi.

Getting Japan's leaders to jump-start their own economy is expected to be a central issue in the bilateral discussions, though U.S. officials say they will not make specific recommendations on how to accomplish the revival. This is Japan's third supplementary budget and second stimulus package in six months.

Japanese government officials are said to have worked all weekend to boost the size of the package following the disapproval markets showed toward plans for a smaller package leaked last week, according to government officials. Last-minute additions included the job-creation program and a proposed extension of unemployment benefits.

Still, many observers remain skeptical that the package can provide enough fuel for the economy to meet the government's new forecast of 0.3% growth for the fiscal year that ends March 31, which reverses the 1.8% contraction envisioned without the latest stimulus package.

Garry Evans, a strategist at HSBC Securities in Tokyo, expects that Japan's economic output will still fall 1%. "But if they hadn't done it, it would have been a complete down slide next year," he said.

Reducing or eliminating Japan's 5% consumption tax would have been more effective, he said. But Taichi Sakaiya, director of the government's Economic Planning Agency, ruled out a reduction. Upping the tax to 5% from 3% last year is widely blamed for sending the economy into a recession.

Less than half of the $196 billion the government is touting involves actual tax cuts or spending, however. The rest comes mostly from loans or loan guarantees extended by government-affiliated agencies.

Still, the expected supplementary budget of $48 billion is twice the size of what had originally been contemplated.

"Since Japan has been taking too many painkillers, its tolerance level is becoming higher," said Teizo Taya, senior economist at Daiwa Institute of Research in Tokyo. "Each time the package comes out, the dosage has to be larger but the disease hasn't been cured."

Including the loans and guarantees, the government said it plans to spend $66 billion on public works and "social infrastructure" programs in areas such as health and telecommunications, $8 billion for job creation and retraining, and $48 billion for loan guarantees to businesses having difficulty borrowing in the credit crunch. In addition, shopping vouchers worth about $180 apiece will be given to those under 15 and those over 65.

The package also includes tax cuts previously outlined by Obuchi that reduce maximum corporate tax rates from 50% to 40% and maximum individual tax rates from 65% to 50% of income.

Sakaiya promised this package was different than past measures that failed because they didn't "try to break the cycles of recession."

Past packages included huge public works projects, such as building roads and bridges in remote areas, which served only to create temporary construction jobs.

A key element in breaking the cycle is curing the credit crunch while priming demand, which will stimulate job growth, Sakaiya said.

With the plunge in real estate and stock market values over most of the last decade, Japanese banks fell dangerously short on capital and cut back lending, setting off a vicious cycle. Firms that couldn't get loans reduced their investment and stopped hiring. That led to a recession and declining sales and profits, causing consumer confidence to wither and spending to decline, Sakaiya said.

Among the social infrastructure plans and job-creation proposals mentioned by Sakaiya is a plan to improve telecommunications by "establishing many information delivery facilities all over the archipelago," including a high-speed underground fiber-optic cable network and other projects.

It is difficult to determine how many of the projects planned by the government will create huge numbers of jobs. Asked to detail specific projects, Sakaiya mentioned only a few, including installing toll-taking machines on highways and building a hub airport in the city of Nagoya, as well as improving airports in Osaka and Tokyo.

Often, however, it isn't lack of funds but bureaucracy and inefficiency that is the core of many of Japan's problems. Many analysts believe deregulation of the economy is the best long-term answer.

"Deregulation and structural changes can be more effective than money," said Taya at the Daiwa Institute of Research.

Indeed, government sources involved in planning the package said Japan's conservative Ministry of Finance balked at some of the projects that the various government agencies were proposing, denouncing them as ill-conceived.

Details also were vague on the proposed jobs-retraining programs for laid off white-collar workers. One proposal calls for the government to pay middle-aged and older unemployed businesspeople to teach computer courses in public schools.

Japan's benchmark Nikkei stock average, which fell 2.4% on Thursday after reports of a smaller package appeared in the press, recovered 1.1% or 160.6 points to close at 14,428 points, while the yen rose slightly against the dollar.

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