Leadership

Japan unveils US$81bn stimulus package, but is it enough?

08.12.2009
The Japanese Government has today announced a 7.2 trillion yen (US$81bn) stimulus package aimed at boosting the world’s second-largest economy.

The government said the package was aimed at making the economy strong once again in the face of growing unemployment, deflation and the tough economic situation.

However, analysts are already questioning the lift this additional spending will provide to the Japanese economy, which they suggest does not even begin to tackle the key problems facing Japan, which include deflation and the weak global economy.

Japan emerged from recession in the second quarter of this year with GDP growth of 0.9pc.

While the country’s economy grew by a further 1.2pc during the third quarter, figures due out tomorrow are expected to show that the initial estimates were over-optimistic, with the Q3 1.2pc growth figure likely to be revised downwards.

Spectre of deflation returns
Despite shaking off the recession, Japan has struggled to replicate the success of many countries amid falling prices and weak consumer demand.

Last month, the government warned that the spectre of deflation had returned to the country’s economy for the first time since 2006, saying that recent price developments showed the economy was in “a mild deflationary phase”.

Japan is no stranger to the effects long-term deflation, which haunted the economy during the so-called ‘lost decade’ in the 1990s.

A period of prolonged deflation can have a devastating effect on a country’s economy. While falling consumer prices can initially boost demand, a race to bottom can then begin on prices. With consumers starting to withhold spending, companies can find themselves facing falling sales and plunging profits, forcing them to cut pay and make layoffs, which in turn leads to a fall in demand and production and an increase in unemployment.