The ruling coalition parties proposed Monday a set of economic stimulus measures that includes the government purchase of exchange-traded funds, a type of investment trust that invests in shares, and the reinforcement of the government’s bad-loan buyback function.
The coalition’s proposals were discussed later in the day at a meeting of the Council on Economic and Fiscal Policy, a key government panel.
During the meeting, the panel’s private-sector members also outlined their own proposals, including the possibility of injecting the nation’s banks with public funds in order to shore up their capital bases, along with the implementation of major tax cuts.
Based on Monday’s debate, Prime Minister Junichiro Koizumi will set out a basic economic stimulus policy around Sept. 20, according to Heizo Takenaka, state minister in charge of economic and fiscal policy.
The government panel will then draft a set of strategies based on Koizumi’s proposals around October, Takenaka told a separate news conference.
After the coalition parties handed Koizumi the economic stimulus package in the morning, the prime minister responded by stating that the government would sincerely examine the recommendations, LDP Secretary General Taku Yamasaki told reporters after the meeting.
As part of the economic stimulus measures, the ruling coalition called on the government to use public pension reserves to buy exchange-traded funds linked to certain stock indexes.
An ETF represents a basket of stocks that reflects an index but is traded like a stock. Unlike a mutual fund, whose net asset value is calculated at the end of each trading day, an ETF’s price fluctuates throughout the day via buying and selling.
ETFs are expected to encourage more people to invest in the stock market because, unlike normal investment funds, they can be bought and sold freely and on margin.
Although the ruling parties and Koizumi reportedly had agreed to the purchase of 3 trillion yen worth of ETFs as an antideflation measure, Yamasaki said that the actual amount was not discussed during Monday’s meeting between the government and the ruling coalition.
“Purchasing (the ETFs) with public funds would be very effective as an anti-deflation measure, since the ETFs cover all stocks used for the Nikkei Stock Average and the Topix” Yamasaki said.
On top of using pension reserves, Yamasaki suggested using postal savings funds and the “kampo” government insurance scheme. He also suggested making Bank of Japan purchases of ETFs the subject of future discussions.
However, Takenaka, expressed opposition to the idea of buying stocks with public funds.
“(The Cabinet) basically opposes conducting price-keeping operations with public funds. I am against putting the government’s hand on the market,” Takenaka told a news conference after the Council on Economic and Fiscal Policy meeting.
Yet Takenaka added that it is possible to consider Bank of Japan purchases of ETFs as a part of its operations. Under law, the BOJ is not authorized to buy securities.
Meanwhile, the ruling parties suggested clarifying the content of proposed tax cuts, which include tax cuts for companies investing in research and development or facilities and equipment, during an extraordinary Diet session scheduled for this fall, Yamasaki said.
As for tax reform, private-sector members of the council proposed implementing tax cuts worth about 0.5 percent of gross domestic product, or more or nearly 2.5 trillion yen. Takenaka commented that the figure is understandable at the present stage, though the issue of tax reform is to be discussed toward year’s end.
At the same time, the ruling parties called for expanding the lending ability of government-affiliated financial institutions to help smaller firms and increasing the capacity of a credit guarantee scheme for smaller businesses, Yamasaki said.
Discussion of the issue will continue at the next meeting of the council, Takenaka said.
The ruling parties also proposed strengthening the bad-loan buyback function of the state-run Resolution and Collection Corp. to accelerate the disposal of bad loans held by the financial institutions.
The proposals come in response to the sharp fall of stock prices last week. The Nikkei Stock Average tumbled to around the 9,000 mark, a 19-year low.
However, Monday’s half-baked measures offer nothing specific for market players to act upon, said Mamoru Yamazaki, chief economist at Barclays Capital.
“This is just a jumble of share price-keeping measures and a reiteration of past government promises,” Yamazaki said.
Policymakers have yet to decide what form tax breaks should take — whether they should be permanent corporate tax exemptions or one-time exemptions to support research and development and other expenditures.
“Telling a public institution to buy up a specific amount of ETFs just because share prices are down and ETFs are down — that’s pure and shameless (price-keeping),” Yamazaki said.
While acknowledging room for debate about using public pension funds to purchase securities, Yamazaki said,
“Portfolio managers should at the very least be purchasing securities based on their own judgment that the investment is sound.
“I don’t think I’m asking for anything radical here.”
Akio Makabe, senior economist at Mizuho Research Institute, said that the package proposes makeshift measures to temporarily raise stock prices and fails to offer a fundamental solution to improve the economy.
For instance, though the purchase of ETFs may raise stock prices, the effect of the measure would be only temporary. As for the reinforcement of the RCC, the ruling parties made the same proposal before, but it was not realized, Makabe said.
“The basic policy of Mr. Koizumi should be changed. One and a half years have passed, and nothing has happened,” said Makabe, referring to the prime minister’s assertion that there would be no economic recovery without structural reforms.
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