Japan unveils supplementary budget of ¥15.4 trillion

The Japanese government expects the country's economy to shrink by 3.3 per cent during the current fiscal year, confirming that the world's second-largest economy is heading for its worst contraction since World War II, the cabinet office said while presenting a supplementary budget of  ¥15.4 trillion ($155 billion), the largest  ever government spending to finance a new stimulus package.

The supplementary budget will be equivalent to about 3 per cent of Japan's gross domestic product (GDP) and will provide extra money to fund  a ¥56.8-trillion package aimed at supporting struggling businesses with credit guarantees, investment in green economy and tax cuts. With the fresh stimuli, the cabinet office expects the economic to grow by 2 per cent by the end of in the current fiscal year – March 2010.

Besides the supplementary budget of ¥15.4 trillion, ¥700billion will be from a special account. In order fund the extra spending the government plans to issue additional bonds to the tune of ¥10.8 trillion, increasing its annual issuance to a record ¥44 trillion. This however will put further strain on Japan's debt, which is at a precarious level and already the largest in the world.

According to IMF, Japan's debt is likely to increase to 197 per cent of gross domestic product next year. (See: Japan's deficit at precarious level: IMF)

Finance minister Kaoru Yosano also warned of a further downgrade in the economic projection due to global financial positions particularly of US and Europe

He told reporters, "Several giant US companies are in critical situations, and depending on how they are treated, not only Japan but also the global economy could be affected," 

The government revised its earlier projection of zero growth announced in December. (See: Japan projects no growth in 2009 ) The Japanese economy, which is heavily dependent on exports, saw exports falling nearly 50 per cent in February this year with the corporate sector facing the brunt of the global slowdown and being forced to introduce cuts in production and staff and the the government revising its growth projection downwards.

Generally the economic forecast in GDP is made in December and revisions are expected around summer. Economists say this early revision is unusual but warranted in lieu of the deteriorating economic conditions. The cabinet office said the Japanese economy has been worsening at an unprecedented pace especially since the last quarter of 2008.

"Japan's export market is rapidly shrinking in tandem with the global economic crisis and the economic downturn is increasing relentlessly," a cabinet office statement said.

The finance minister also told reporters, "Exports have dropped much harder than we expected. So far the economic growth has been much lower this year than our initial estimate in December."

Employment falls
He echoed the same sentiment in the country's parliament, saying, "Exports and production are falling drastically, while employment conditions are rapidly worsening. Businesses financing is also critical, and Japan is in the middle of a financial crisis." 

With unemployment rising, corporate demand falling and consumers tightening their belts, there is also a growing risk of deflation surfacing in the coming year, according to the government.

Japan has been hit hard because of its economy's heavy reliance on manufactured exports making it the worst economic growth projection among major industrialised nations.

Global recession is forcing consumers in the US, China and Europe to tighten their belts, which in turn is further push Japan into a deeper recession.

Japan is facing its biggest economic crisis since World War II and its economy shrank at an annualised pace of 12.7 per cent in the fourth quarter of 2008, the worst also since the oil crisis of 1974. It is estimated to shrink drastically by 14 per cent in the January-March quarter.

The cabinet office is optimistic in the face of 2nd consecutive economic contraction and said the government's economic stimulus package prevented a negative spiral which could have seen a decline of about 5.2 per cent.

For fiscal year 2009-10, the government expects exports to plunge a record 27.6 per cent from the previous year, instead of the 3.2 percent drop it projected in December and industrial output is expected to drop 23.4 per cent, the biggest fall so far. Business investment is expected to fall by an estimated 14 per cent from its previously estimated fall of 4 per cent, unemployment could increase to 5.2 per cent, inching closer to the postwar record.

The government's economic stimulus measures are likely to create nearly 200,000 more jobs in fiscal 2009, it said.

IMF has projected Japan's economy to shrink 6.2 per cent in 2009, down 0.4 percentage points from its previous mid-March forecast, but expects it to start picking up in the second half of this financial year. (See: Japan's deficit at precarious level: IMF )