The government has compiled the largest-ever economic stimulus package in the form of a fiscal 2009 supplementary budget, involving actual spending of ¥15 trillion. This is much larger than the past biggest stimulus package of ¥7.6 trillion, which the Obuchi administration compiled as a third supplementary budget for fiscal 1998.

The package indicates Prime Minister Aso Taro’s desire to make Japan the first major economy to emerge from recession. To help Japan overcome a “once in a century” economic crisis, in which aggregate demand is ¥20 trillion less than aggregate supply, it is understandable that the government places priority on stimulating the economy rather than on financial reconstruction.

But it seems that the package’s size is the result of demands made by the ruling parties, government ministries and business organizations, rather than through rational prioritization. It also includes policy measures that are obviously designed to win votes for the ruling party in the upcoming Lower House election. Other measures are aimed at raising Japan’s status in the international community by showing that Japan is taking action to help end the global economic downturn.

The package spends ¥4.9 trillion for emergency measures to help stabilize employment and assist enterprises having cash flow problems. The cap on loans from the Development Bank of Japan will be raised to ¥15 trillion and government guarantees for loans to smaller enterprises will expand to ¥30 trillion.

The package allocates ¥6 trillion to sectors likely to see long-term growth through environmentally friendly products and health-promoting services. A consumer who scraps an old car and buys an environmentally friendly car will receive a subsidy of up to ¥250,000. A purchaser of energy-saving home electronics will receive a refund equivalent to 5 percent of the cost. It also includes a gift-tax reduction for wealthy families to boost the housing market, and a ¥36,000 yearly allowance for preschool children in a certain age bracket.

The government is issuing bonds worth ¥43 trillion for fiscal 2009, including ¥10 trillion for the extra budget, meaning the financial burden will be shouldered by future generations. The Diet should scrutinize whether the measures are well thought out and will be effective.

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