Japanese Economy May Require Further Stimulus Measures

By: Dr. Mike Campbell

Naoto Kan was the economy minister before moving into the hot seat as the prime minister of Japan. Consequently, he should be better placed than most when speaking of the economic difficulties currently facing his country. The Japanese economy is export driven and managed to grow at 5% in the first quarter of 2010. However, figures to be released for Q2 are expected to show that economic growth has slowed by about a quarter; mirroring a slowdown in Japan’s largest trading partner, America.

Speaking in Japan last week, the PM commented that "Generally speaking, the economy is picking up steadily, but the jobless rate is at a high level and optimism is not warranted about the situation in other countries." He continued; "We will closely watch how the economy is performing to decide whether we need to take some kind of response."

The government approved an additional $81 billion stimulus package as recently as December, but Mr Kan suggested that further measures may need to be taken in the light of a weak and possibly faltering global recovery and in the face of high domestic unemployment, poor consumer sentiment and deflation. A further round of stimulus measures could be funded from current budget reserves.

The slowdown in Japanese growth is being intensified by the current high value of the Yen. In addition to making Japanese exports more expensive to her trading partners, the currency’s strength makes rival exports from neighbours such as China and South Korea more attractive to them. In October 2007, shortly before the global financial crisis struck, the Yen was trading at 120 to the Dollar; yesterday, it closed at just 86.5 to the Greenback. As finance minister, Mr Kan stated that he wanted to see the Yen at 105 to the Dollar.