Japan stimulus package on the way


LDP policy chief Shizuka Kamei says Japan's reform package will come by week-end

By Staff and wire reports

TOKYO, Japan -- Japan's ruling coalition will release an emergency package later this week to stimulate its slumping economy.

Shizuka Kamei, policy chief of the dominant Liberal Democratic Party, said the package would be compiled around March 8 or 9.

The package will likely include measures to encourage Japanese banks to write off a large amount of bad loans they are carrying on their books.

It is also expected to try to stimulate Japan's housing market and slumping stock market.

Reforms get skeptical reception

But Japan watchers are skeptical that government-led reforms will produce results.

Atsushi Mizuno, chief economist with Deutsche Securities in Japan, noted the LDP-led ruling coalition has become increasingly short-sighted as its unpopularity mounts. Opposition parties have submitted a no-confidence vote against Prime Minister Yoshiro Mori.

The Japanese government has a history of introducing economic-stimulus packages in March, to little effect.

"The government is trying to sort out structural reform, but the market has been hearing that for four or five years now," Mizuno said.

He noted the government had introduced a stimulus package eight out of the last 10 years, to little effect. He said the current promises of reform are "typical" and have only disappointed Japan's stock market, at multiyear lows.

Impact on home ownership likely to be minimal

The package will probably include some minor tax reform, such as to encourage home ownership. But Mizuno said the impact would likely be minimal. Japan limits the amount of mortgage interest homeowners can deduct over a 10-year period.

Politicians in the three-way coalition have been toiling for weeks to assemble measures that could halt a relentless slide in stocks and revive the economy. The coalition hopes to boost its popularity before an Upper House election in July.

Kamei spoke to reporters after meeting LDP Secretary General Makoto Koga. Koga said Friday the emergency package would focus on steps to revitalize the fragile stock market and boost the liquidity of the real-estate market -- a goal of successive governments for years.

But economists said the government was unlikely to announce plans for a significant infusion of public money.

"We do not so far expect large-scale spending measures," said Tomoko Fujii, director of economic and market analysis at Nikko Salomon Smith Barney.

Japan's deficit is already huge, which limits the government's options. New spending measures are also unlikely until the Japanese budget is enacted into law.

Eyes on the central bank

Experts say the weak coalition lacks the power to exert much pressure on the central Bank of Japan. As a result, the BOJ is likely a more important player than the government, Fujii said.

Economists want the central bank to supply more money to the Japanese economy, a step called "quantitative monetary easing."

Kamei also told a senior Bank of Japan official that the central bank should take quantitative easing steps to ease deflationary pressure, sources told Reuters.

The senior central bank official responded that the BOJ would study the issue, the sources said.

Economists hope the BOJ will announce steps to purchase more Japanese government bonds. But at least publicly, the government is likely only to recommend further monetary easing rather than calling for specific action.

BOJ Governor Masaru Hayami has argued against quantitative easing. If it comes, the easing would involve either the BOJ buying Japanese government bonds or setting inflation or monetary targets.

The BOJ announced a surprise interest-rate cut last Wednesday. It trimmed its overnight money market call rate target to 0.15 percent from 0.25 percent.

But with the cost of borrowing already very low in Japan, equity markets did not respond. Market strategists said Japanese stocks would not respond to anything short of a return to zero interest rates.

The BOJ abandoned zero interest rates last summer. There is speculation Hayami may resign if forced to return to a zero interest-rate policy.

ENDS

Reuters contributed to this report.