The Cabinet approved a second round of fiscal stimulus worth ¥880 billion that makes use of budget reserves as Prime Minister Yoshihiko Noda attempts to boost the economy before the Lower House election Dec. 16.
Combined with a first round of stimulus announced last month, the latest measures will increase gross domestic product by about 0.4 percentage point, the Cabinet Office said Friday. The package includes deregulation and other policies that won’t require fresh spending, it said.
It is unusual to compile a stimulus package before an election. The move might draw opposition fire as a pork-barrel spending tactic to boost votes at the last minute.
Noda’s ruling party and the Liberal Democratic Party, which polls suggest may win the election, have pledged more spending afterward as falling October retail sales and exports suggest the economy is in recession even as industrial production rose for the first time in four months. Any major fiscal stimulus could worsen the national debt, the largest in the world at more than twice GDP.
“The attention of financial markets is already shifting to economic stimulus to be drafted by a postelection government, which could be at least ¥5 trillion,” said Azusa Kato, an economist at BNP Paribas SA. “Public works projects would have an immediate effect to prop up growth, though whether such an old-style remedy would be a good choice in the long run is a different story.”
LDP leader Shinzo Abe said Friday that he wants to issue construction bonds and increase public works to create jobs, spur growth and end more than a decade of deflation. Economy minister Seiji Maehara said earlier this month that using reserve funds from this year’s budget won’t be enough to support the economy.
The latest package contains measures to boost child care, help small companies borrow and support for reconstruction from the 2011 earthquake and tsunami. The package is worth ¥1.2 trillion if spending by local governments and private companies is taken into account, the Finance Ministry said.
The package will also introduce some deregulatory steps, such as relaxing rules on investment by financial institutions in private companies.
Under the plan, the government will make it easier for lenders and companies to use the government’s dollar-loan program, allowing firms to borrow to support overseas subsidiaries hurt by natural disasters, riots or other events.
The lending facility is worth ¥10 trillion and uses Japan’s foreign reserves to support overseas mergers and acquisitions and resources purchases by Japanese companies. The loan program will also open credit lines for regional banks and the Development Bank of Japan.
To create the fresh stimulus, the government will tap reserve funds under the fiscal 2012 budget and will not issue any new debt.
The government decided on a similar package in October, but it was limited to ¥422.6 billion.
The economy may fall into a recession in the quarter ending in December, based on the definition of a recession as two consecutive quarters of contraction. Gross domestic product will fall 0.4 percent in the period, according to a Bloomberg survey of economists, after shrinking 3.5 percent in the previous three months.
Japanese recessions are officially defined by a government-charged panel that considers data beyond figures for GDP.
Meanwhile on Friday, officials said the government will continue to cap its key policy spending at ¥71 trillion ($861 billion) under the fiscal 2013 budget to maintain fiscal discipline.
Noda’s Cabinet decided on the basic guidelines to create the state budget for the year starting next April, which is expected to eventually total more than ¥90 trillion, also including debt-servicing and other costs.
The key policy spending covers areas such as social security measures and grants to local governments. Requests for it from government offices had added up to over ¥73 trillion and the Finance Ministry will trim the requests.
The guidelines also confirmed the new budget will keep focusing on disaster recovery and longer-term strategies to boost Japan’s growth and beat chronic deflation, officials said.
The government normally compiles a draft budget in late December for submission to the Diet in January. But this year’s process is to be delayed due to the Dec. 16 general election, the outcome of which could lead to a change of government and cause significant change to the guidelines.