Japan struggles against deflation, approves extra $61bn budget

08 October 2010 06:08  [Source: ICIS news]

SINGAPORE (ICIS)--Japan finance minister Yoshihiko Noda said on Friday that the Japanese economy is struggling with deflation, which necessitates the adoption of very loose monetary and fiscal policies.

The country's cabinet approved a fresh stimulus package worth yen (Y) 5,050bn ($61.29bn) on Friday, based on media reports.

With deflation, Japanese households do not perceive improvements in their living standards even though their real income had increased, Noda said, adding that this perception leads to consumption cutbacks.

The approval for the extra budget came days after the Bank of Japan did a surprise interest rate cut to 0.1% on Tuesday, as Japan's economic problems were being compounded by the continued strength of the yen.

"The rapid appreciation of the yen, which has reached its highest level in 15 years, quells expectations for economic recovery and casts a shadow over sentiments of both firms and households," said Noda in a statement released at the Ministry of Finance website.

"Under these circumstances, central banks have a very important role to play. The Bank of Japan will maintain an extremely accommodative financial environment, and, if judged necessary, will take policy actions in a timely and appropriate manner," Noda said.

The Japanese central bank had intervened in the foreign exchange market to curb the currency's further rise on 15 September, the first time the yen hit a 15-year high.

A strong yen, which surged to a fresh high of Y82.62 against the dollar on Thursday, makes Japanese goods more expensive in the international markets and hurts the profitability of most of the country's companies due to their heavy reliance on exports.

Japan's exports had improved in recent months after the slump in 2009. In August, overseas shipments grew 16.5% year on year to Y4,316bn, based on preliminary government data.

From the fiscal side, measures like the preparation of supplementary budget should help ward off any downside economic risks that may arise from factors like the strong yen, Noda added.

"In order to end deflation. it is essential that Japan enhance its growth potential and eliminate concerns about its future," he said.

($1 = Y82.39)

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By: Pearl Bantillo
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