Staff writer

Now that the 520 billion yen supplementary budget for job-creation measures is expected to clear the Diet today, the focus has shifted to what's next.

Despite surprising economic growth in the January-March quarter and other recent positive signs, few believe Japan will regain its economic strength without more action.

The question now is whether the government should opt for more fiscal spending as early as September, and, if so, how much and for what purpose.

Some economists consider vast public works spending a must to get the economy on a recovery track. Others want measures to improve the industrial structure rather than stopgap public works.

Heated debate will likely continue until early September, when the gross domestic product figure for the April-June quarter will be released.

No one appears to expect the latest job-creation package alone, which the government hopes will create more than 700,000 jobs, will boost the economy. Even Finance Minister Kiichi Miyazawa has acknowledged the package is more intended to curb unemployment caused by accelerated corporate restructuring.

The unemployment rate in May was 4.6 percent after hitting a record 4.8 percent in the previous two months.

The workforce is one of "three pillars of excessiveness" plaguing industry since the collapse of the bubble economy. The other two -- debts and facilities -- are expected to be taken care of by industry-revitalization bills, to be approved by the Cabinet today.

Kazuhiko Sano, chief strategist at Daiwa Securities SB Capital Markets Co., said the 700,000-job target is "an overestimate."

The package's largest project, worth some 200 billion yen, includes subsidies to local governments to temporarily hire foreign-language and computer instructors for elementary and junior high schools. The government reckons this project could create 300,000 jobs, enough to employ 10 percent of those currently out of work.

"But how many of such capable people are jobless in the first place?" Sano asked.

Susumu Takahashi, chief economist at Japan Research Institute, a private think tank, also doubts the project will be effective, because it can only create temporary jobs. "They will lose jobs again two years later," Takahashi said.

But he otherwise welcomes the package for its overall direction, because he said it could help promote structural reform in industry by encouraging a shift of workers from old sectors to new ones.

The package includes a 90 billion yen project to create 150,000 new jobs in the computer and telecommunications and other fast-growing fields.

The issue of a next supplementary budget is much more controversial.

"Fiscal stimulus is absolutely essential" when people are worried about their debts so much that they do not consume or invest, Richard Koo, chief economist at Nomura Research Institute, said in a recent speech.

Koo calls it a "balance-sheet recession," in which people focus on improving their damaged balance sheets -- with plunged asset values and outstanding debts -- since the bubble burst in 1990.

He said fiscal stimulus always works to increase incomes even if it centers on inefficient, conventional public works, criticizing economists who oppose such measures.

Conventional public works usually means road and bridge construction in rural areas where the facilities are often considered unnecessary.

The ruling Liberal Democratic Party has routinely been criticized for promoting such projects as a quick tool to please voters in the construction industry.

Koo said he personally favors better projects. But in Japan, "there is no luxury of rejecting conventional fiscal policies because if we don't do it, the economy will collapse," he argued.

Foreign investors, the driving force behind the recent stock price upturn, "are worried that things may dry out by September," he said.

The government should consider a second extra budget of up to 10 trillion yen, if necessary, before the foreign investors flee, Koo told The Japan Times.

The government has officially remained noncommittal about a second extra budget. But Taichi Sakaiya, head of the Economic Planning Agency, indicated in a recent TV show that as much as 5 trillion yen in public investment would be necessary, depending on the April-June GDP.

The GDP -- the total value of goods and services produced in Japan -- grew at an annualized 7.9 percent in the January-March quarter from the previous quarter. This unexpectedly strong figure was partly due to huge public investment, and still leaves many people,including Sakaiya, wary about the next quarter.

Many economists believe public works will run out of steam early next year.

Yasuyuki Komaki, an economist at NLI Research Institute, an affiliate of Nippon Life Insurance Co., said the effects of the public investment in two stimulus packages in 1998 will peak during this July-September quarter.

The effect appearing in the January-March 2000 quarter will fall at least 1.9 trillion yen from the previous quarter, according to his conservative estimate. That indicates another 2 trillion yen in public investment would be necessary if the gap is to be filled.

But he warned against an easy decision on a huge stimulus package, even if the April-June GDP turns negative.

"You will have to come down from 'the hill' at some point," he said, indicating there is a limit to fiscal resources. He also pointed out that effects of fiscal stimulus have been declining for the past several years.

Some economists emphasized the need to promote industrial structural reform.

Takahashi at JRI argued that a second supplementary budget should include measures to nurture new industries by providing tax advantages for investment, which would require no more than 3 trillion yen.

Such a package would have less economic boosting power without the help of more public works, he said. But adding conventional public works would only disappoint financial markets because of their short-term effects on the economy.

It is also believed that issuing a huge amount of government bonds to finance public works can risk pushing up long-term interest rates, which in turn stifle business activity.

Koo rebuked the theory by citing Japan's extremely low interest rates at present.

Akiyoshi Takumori, chief economist at Sakura Securities Co., advocates an approach based on specific needs.

"You should first make a list of necessary projects that require public spending ... and carry them out even if they are costly," he said.

For example, the government should set up recycling plants for plastic bottles in vast areas of unused land in the Tokyo-Yokohama industrial area, he said.

Even if it requires the issuance of new government bonds, such a future-looking, environment-friendly project would not help downgrade government bonds and push up interest rates, he said.

There is no better timing for such projects, considering the ultralow interest rates and the availability of suitable land, according to Takumori.