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Japan govt sets $16.5 bln inflation relief spending

TOKYO - Japan unveiled plans on Friday to spend about $16.5 billion extra this year to ease the pain to businesses and consumers from rising oil and food prices, but its package looked unlikely to help avert recession or restore the government's sagging ratings.

The total economic package was worth about $107 billion but much of that included non-cash measures such as loan guarantees for small businesses, which analysts warned would do little to ease public anxiety about a bleak economic outlook.

"Global rises in oil and food prices are having a significant impact on the Japanese public," Fukuda told a group of cabinet ministers and other officials from the ruling coalition who signed off on the measures.

"It is important that we support the people and small firms and strengthen the Japanese economy by quickly implementing a comprehensive package of steps."

Many economists say Japan is either already in recession or about to tip into one. Data released on Friday showed job offers at a nearly four-year low and inflation at a decade-high.

Analysts questioned the impact of the 11.7 trillion yen package in both economic and political terms, saying it would do little to boost Prime Minister Yasuo Fukuda's soggy ratings ahead of an election that must be held by late 2009.

"Talk of replacing Fukuda will resume and the need for more decisive leadership will become more urgent," said Jesper Koll, president of investment advisory firm Tantallon Research Japan.

At the insistence of the smaller party in the ruling coalition, the New Komeito, the package included a promise of temporary tax cuts, but gave no details.

But, faced with huge public debt, Fukuda has sought to keep new government spending to a minimum despite pressure within the ruling bloc to revert to past pork-barrel practices.

He said the government did not plan to issue extra government bonds to finance the package.

"We will maintain our basic stance that we aim to achieve growth and strengthen the economy through reforms," Fukuda said.

Finance Minister Bunmei Ibuki also told reporters that the government might need to draft a second extra budget for the year to March 2009, depending on the size of the temporary income tax cuts.

At around 2 trillion yen in new spending, the package will be smaller than past programmes that aimed to stimulate the economy through pork-barrel spending, amounting to 0.4 percent of GDP.

Debt mountain

In comparison, the United States produced a $150 billion economic stimulus package earlier this year to help its economy cope in the aftermath of the subprime mortgage debacle.

The package, around 1.3 percent of GDP, included tax rebates of up to $600 per person.

Economists said the Japanese effort lacked a consistent message.

"There is no philosophy behind it, so it's unlikely to spur people's increased confidence in economic management," said Robert Feldman, chief economist at Morgan Stanley in Tokyo.

A row over whether to include temporary income tax cuts had complicated efforts to craft the package, with many in Fukuda's Liberal Democratic Party doubtful these would cheer consumers much.

But the New Komeito demanded the tax relief, which would be especially welcome to its lower income supporters.

The New Komeito helps make up the ruling bloc's two-thirds majority in parliament's lower house, which allows it to override vetoes by an opposition-controlled upper chamber.

Its cooperation with the LDP in the election, which may come well ahead of the September 2009 deadline, is also vital.

Funding for the package was a source of contention, with the New Komeito and some in the LDP arguing relief for consumers and firms should take priority over fixing fragile public finances.

But cabinet ministers did not want extra government bonds to be issued for the package because of Japan's huge public debt, a legacy of past pump-priming packages and now equal to about one-and-a-half times GDP. Fukuda said none would be issued.

A voter-pleasing package might have encouraged Fukuda to call an early snap poll for parliament's lower house to try to gain a mandate to break a political deadlock in which opposition parties control the upper house.

But going to the polls would be a big risk for the ruling bloc, since it is almost certain to lose its two-thirds majority in the more powerful lower house.