Create a free account to continue

Japanese Gov't Takes Aim At Surging Inflation

Japan unveiled a stimulus package with $18 billion in fresh spending to shore up its flagging economy as figures showed inflation spiked to its highest in nearly 11 years.

TOKYO (AP) -- Japan unveiled a stimulus package with 2 trillion yen ($18 billion) in fresh spending to shore up its flagging economy on Friday as figures showed that inflation has spiked to its highest in nearly 11 years, denting consumer spending.

Measures in the package span discounts on expressway tolls to assistance to farms and help for part-time workers to find better jobs. Funds are also earmarked for better medical care, ecological technology, housing loans and education, according to the Cabinet Office.

Economists are skeptical that the package will help revive Japan's economy, which shrank 2.4 percent at an annual pace in the second quarter.

And critics call it a publicity stunt to lift Prime Minister Yasuo Fukuda's dismal approval ratings.

"This is just reckless spending," Yukio Hatoyama, leader of the main opposition Democratic Party, said on nationally televised news. "The package is aimed at getting voters' attention in anticipation of the next election."

All told, the value of the programs involved comes to 11.7 trillion yen ($107.5 billion). Aside from the $18 billion cash infusion, most of the package consists of non-spending measures such as lower road tolls and loans to businesses.

Friday's package did not include tax breaks, but cuts will be considered in the future, the government said.

Masamichi Adachi, senior economist for JP Morgan Securities in Tokyo, called the new spending a "drop in the bucket" compared to Japan's total gross domestic product of about 500 trillion yen, or $4.6 trillion.

"It's definitely positive, but to what extent (is the question)," he said.

July economic figures released Friday painted a mixed picture of the Japanese economy. Industrial production rose modestly, but the outlook is choppy. The jobless rate fell and retail sales rose. Household spending declined but not as steeply as expected.

The rapid acceleration in inflation was the most alarming of all the indicators released.

Japan's core consumer price index, which excludes fresh food prices but includes energy, rose 2.4 percent in July, the quickest pace in almost 11 years, the Ministry of Internal Affairs said.

While Japan's economy is indeed slowing, many economists see the downturn as mild, with little risk of the sort of deep recession that crippled the country in the 1990s.

"We've been calling this a 'shallow recession,' and the data today tend to support that view," Adachi said. "But that doesn't mean they point toward a quicker recovery either."

The Bank of Japan, meanwhile, is unlikely to tighten monetary policy in response to inflation, even though July's figure surpasses the central bank's inflation target range of 0-2 percent. Last week, policy board members kept the key interest rate unchanged at 0.5 percent.

So-called core-core inflation excluding food and energy rose a modest 0.2 percent, indicating that huge price gains have yet to permeate all sectors.

Merrill Lynch economists Takuji Okubo and Masayuki Kichikawa said earlier this week that current inflation appears to be a short-term trend.

"Going forward, whether core measures of CPI excluding food and energy would show signs of inflation would be the key factor in determining (the Bank of Japan's) actions," they said.

Overall CPI was up 2.3 percent in July, while core CPI for the Tokyo area rose 1.5 percent in August.

Among other key economic data, Japan's industrial production in July was up 0.9 percent from the previous month on a seasonally adjusted basis, posting the first rise in two months on higher output by makers of cars and electronics.

"Improved external demand for products of those industries in July seemed to be in the background of their industrial production gains," said UBS economist Akira Maekawa in a research memo.

The news cheered investors, who helped push the benchmark Nikkei 225 stock index up 2.9 percent Friday. Stronger-than-expected economic growth figures in the U.S. in the second quarter -- up 3.3 percent at an annual pace -- also lifted sentiment.

The outlook for industrial production looks uneven. The Ministry of Economy, Trade and Industry said it expects production to fall 2.9 percent in August before increasing 3.4 percent in September.

Japan's unemployment rate fell from 4.1 percent to 4 percent in July.

Meanwhile, spending by Japanese households slipped 0.5 percent from a year earlier but was more robust than anticipated. Hotter weather spurred sales in items like air conditioners and certain types of food, Maekawa said.

Retail sales in the country rose 1.9 percent in July from the previous year, the government said.

More in Supply Chain