• Kyodo, Bloomberg

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The Cabinet approved ¥422.6 billion in emergency spending Friday to underpin the economy and prevent it from tipping into recession on waning domestic demand before the planned consumption tax hike.

The package, including financing from regional governments, totals more than ¥750 billion. It is the first in a series of steps aimed at spurring growth at a time when reconstruction-related demand following the March 2011 quake and tsunami begins to slacken.

“We will accelerate our efforts to ensure an early exit from deflation and revitalize the economy,” Prime Minister Yoshihiko Noda was quoted as telling his ministers Friday by Chief Cabinet Secretary Osamu Fujimura.

Speaking with reporters, economy minister Seiji Maehara said the new measures would boost gross domestic product by 0.1 percentage point, although he declined to specify what period this relates to.

Still, the size of the stimulus is relatively small because the government is still attempting to enact a bill to issue deficit-covering bonds for fiscal 2012 amid political gridlock in the Diet.

Noda said full-fledged stimulus steps would follow as early as next month, although Maehara admitted the government has yet to decide on how to fund these extra measures and that it is too early to estimate their size.

With the government’s new stimulus, the Bank of Japan will find itself under renewed pressure to join efforts to combat chronic deflation ahead of its policy meeting Tuesday, when the bank is expected to further ease its monetary grip to support growth.

The emergency package will be financed mainly by contingency funds under the fiscal 2012 budget, and the government will not issue any new debt. Using contingency funds does not require any prior approval by the Diet, where opposition parties are demanding that Noda fulfill his August pledge to dissolve the Lower House for a snap election.

The latest stimulus focuses on spurring sectors including the environment, medical and health care, as well as the agriculture, forestry and fisheries industries. The government will spend ¥105.1 billion to that end, including ¥41.1 billion to promote greater use of clean energies among households and factories.

It also set aside ¥3.8 billion to encourage research and development of artificially derived multipurpose stem cells, after Kyoto University professor Shinya Yamanaka was jointly awarded this year’s Nobel Prize in physiology or medicine for his work in induced pluripotent stem (iPS) cells.

Another ¥120.3 billion will go toward rebuilding disaster zones in the Tohoku region in the form of subsidies for local companies, while ¥144.0 billion will fund public works projects to step up disaster-prevention efforts nationwide, including reinforcing roads and ports and enhancing the quake-resistance of schools.

Economic growth has slowed as demand linked to postdisaster reconstruction in the northeast has started to ease, and because the budget for the government subsidy program to encourage purchases of eco-friendly vehicles ran dry in September. Gross domestic product is widely expected to contract in the third quarter.

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