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Japan economy steps

seen boosting

sentiment abroad

TOKYO: Japan's plans for drastic economic stimulus measures in the next few months should have a positive effect on the economy but will prove an even greater fillip for foreign investors' confidence, economists said on Monday.

Government and international bodies have recently expressed concern about the outlook for the Japanese economy, not least about the problems of massive bad loans in its banking sector.

The U.S. Treasury Department on Friday said Japan's economic recovery had taken "a disappointing turn" and voiced concerns that this "cast a shadow" over an otherwise favourable international economy.

To address these concerns, Japan has lined up a variety of economic measures, starting with a second supplementary budget which will be submitted to parliament in October.

"The government must compile a budget exceeding 10 trillion yen ($104 billion) to stop a decline in the economy," Liberal Democratic Party (LDP) Secretary General Hiroshi Mitsuzuka told reporters over the weekend.

The LDP is the largest party in the three-party coalition government led by Socialist Prime Minister Tomiichi Murayama. Having suffered setbacks in Upper House polls last month, the newly reshuffled cabinet has made economic recovery its top priority amid possible Lower House elections later this year.

Within a month or so, the government will also unveil an overall scheme to help its ailing banking sector. On Monday, authorities were due to announce government aid to wind up Tokyo credit union Cosmo Shinyo Kumiai, which ran into deep financial trouble this summer after a run on its deposits.

Ron Bevacqua, an economist at Merrill Lynch Japan Inc, said the economy looked worse to the outside world than it actually was and government action should help soothe worries.

"Although the stimulus package will have some positive effect on the economy, it will have even greater impact on foreign sentiment," he said.

The Ministry of Finance (MOF) is currently putting together a budget for the next fiscal year starting April 1, 1996, with emphasis on economy-boosting measures such as public works spending and technological development.

Budget requests from ministries and state agencies are projected to total 79.19 trillion yen ($824 billion) for next fiscal year, 11.6 percent higher than this year's original allocations. The last time budget requests grew by double digits was in 1990/91, when they rose 11.4 percent.

Although the government is eager to cut costs, given snowballing debt payments and weak tax revenues, MOF officials have said they may have to consider deficit-financing bond issues to cover the requests.

"It is necessary to implement economy-boosting steps such as additional public works projects quickly and incessantly to put the economy on a sure recovery path toward next fiscal year," a report by the Yamaichi Research Institute said.

One step Japan's authorities do not yet appear ready to take is a cut in interest rates, economists said.

A senior official at the Bank of Japan had said the German Bundesbank's cut in its key discount and Lombard interest rates last week would not affect Japan's monetary policy.

Even if the United States cuts its interest rate in September as widely expected, Japan's central bank will not have to cut its rate as the currency markets are expected to move little, having factored in the U.S. move, economists said.-Reuter