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Many economists criticized the 16 trillion yen stimulus package announced by the government April 24, saying its positive effects will only be temporary and won’t be strong enough to put the economy back on the road to recovery.

However, some optimists believe it will drag the economy back from the brink of recession. Ryutaro Kono, a senior economist at Dai-Ichi Life Research Institute, an affiliate of Dai-Ichi Mutual Life Insurance Co., said he was disappointed with the public works-oriented stimulus package.

“I have the strong impression that this is a package for the Liberal Democratic Party to win in the upcoming Upper House election, to please its supporters (in the construction industry),” Kono said.

The DLRI expects the package to help avert negative growth in fiscal 1998, which runs through next March, and that the real gross domestic product growth rate for the year will rise to 1 percent at most. The institute had previously estimated the fiscal 1998 growth rate at minus 0.6 percent.

Public spending should focus on projects that promote economic efficiency, Kono said. It would be wiser, for instance, to distribute personal computers to 12 million children at elementary and junior high schools and build up an optical fiber network among the schools. That would cost only 4 trillion yen in total and, unlike traditional public spending on construction projects, lead to higher labor productivity in the future, according to Kono.

Also necessary are income tax reductions by way of systematic reforms, which will benefit entrepreneurs who take risks to start new businesses, he said.

Susumu Takahashi, chief economist at the Japan Research Institute, a private think tank, is another harsh critic of the stimulus package. “Public works spending only has a temporary effect and will not lead to sustainable growth,” he said.

The JRI estimates the package will lift the real gross domestic product by about 1 percent in fiscal 1998, bringing the expected growth rate to 0.3 percent. But even though the economy will bottom out toward the end of this year, it may lose steam next year after the short-term effects fade out, Takahashi said.

There will be only a limited effect on improving the confidence of consumers, he said, adding his prediction is that only one half of income tax cuts will be used for consumption and the rest will be saved.

Nikko Research Center, a think tank related to Nikko Securities Co., predicts the package’s GDP-boosting effect will be 1.5 percent at most, which means real growth for fiscal 1998 will only be 0.3 percent in a best-case scenario.

The announced tax cuts do not appear sufficiently effective to halt the decline of consumer spending, said Kazutoshi Aratake, an NRC economist. The 2 trillion yen tax break carried out earlier this year did not produce tangible effects, Aratake added.

On the other hand, Richard Jerram, chief economist at ING Baring Securities (Japan) Ltd., is much more optimistic. Jerram said the fiscal package will help Japan’s economy achieve a real growth of 1.9 percent in fiscal 1998, as targeted by the government.

The current economic problems have been caused by last year’s fiscal policy mistake, when the government increased the tax burden by a total of 9 trillion yen and decreased public investment by 9 trillion yen compared with a peak figure in 1996, he said. Reversing the policy mistake will boost the economy, according to Jerram.

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