Australia and Japan offer new stimulus plans

HONG KONG:Australia announced a $26.5 billion stimulus plan and a deep interest rate cut on Tuesday as the Japanese central bank said it would start buying shares held by financial institutions to try to ease the burden on lenders in efforts to shield their economies from the worsening downturn.

The announcements followed a flurry of economic data, job cuts and profit warnings in recent weeks that have shown the region is slowing faster than had been expected as demand in the United States and Europe withers.

Related article: Australia launches massive stimulus package (AFP):
Prime Minister Kevin Rudd said the massive stimulus package was aimed at nation building and supporting up to 90,000 jobs “in the face of the unfolding national and international economic emergency.”

“The weight of the global recession is now bearing down on the Australian economy,” said Wayne Swan, Australia’s treasurer, in a statement accompanying the stimulus announcement. “In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs.”

The measures came as the Australian central bank cut its key benchmark cash rate by a full percentage point to 3.25 percent, the latest in a string rate cuts that takes the country’s cost of borrowing to a record low. Together, the measures are designed to prop up growth in an economy that has seen its main driver – a boom in mining – fizzle amid the global economic downturn.

Craig James, chief economist at Commonwealth Bank of Australia, said the fresh measures were “very positive for the Australian economy,” and that the string of rate cuts represented “the most aggressive easing of monetary policy that Australia has ever seen.”

“We’ve got both arms of the Australian economy, both monetary and fiscal policy, working in unison,” he said, adding that the measures “should prevent the economy from notching up two consecutive quarters of negative growth, which is the technical definition of a recession.”

Japan, by contrast, is already in recession, and the central bank has already cut interest rates to nearly zero.

On Tuesday, the Bank of Japan announced it would purchase of up to 1 trillion yen, or $11.1 billion, of banks’ shares in corporations to shore up banks’ capital and reduce their exposure to the stock market.

The Japanese financial system has remained stable, mainly because Japanese lenders were little exposed to the U.S. mortgage-related troubles.

But the fall in stock prices last year means many Japanese banks have “reported massive realized and unrealized losses, suggesting that coping with market risk associated with stock holdings remains their critical business challenge,” the Bank of Japan said in a statement.

As the economic slowdown continues China is widely expected to announce new measures that will complement a massive stimulus package outlined in November.

Economists believe the key priority for the Asia-Pacific region is to reduce its reliance on exports and to stimulate domestic consumption. The head of the International Monetary Fund, Dominique Strauss-Kahn, on Tuesday reiterated this point, saying that it is “impossible for Asia to have a recovery while the rest of the world is in bad shape,” Reuters reported.

James, the economist at Commonwealth Bank of Australia, said the impact of the regional stimulus packages depended on what happens in the United States.

“Once the U.S. authorities start to improve the functioning of the credit system, the financial system, then we’ll start to see confidence return,” he said. “Once we do get improvement in the health of the U.S. financial system, there will be less need in places like Australia to go down this path of stimulus packages.”

The measures announced by Australia comprise 42 billion Australian dollars, or $26.5 billion, in spending on infrastructure, schools and housing, as well as payments for low-income earners. It comes on top of a raft of measures already announced last year.

Swan, the Australian treasurer, said the measures would help stave off recession, though at the expense of causing the budget deficit to swell to 22.5 billion Australian b dollars, or 1.9 per cent of GDP.

“Decisive action is now required to strengthen the Australian economy and in these circumstances, a temporary deficit is the only responsible course of action to support jobs and economic growth,” Swan said.

Australia’s economy has benefited hugely in recent years from a global commodity boom that saw oil prices rise to more than $147 a barrel last year. As the global economy ground to a halt, so did the rise in commodity prices.

The Australian government has estimated that the global recession, which has also caused growth in China, a major consumer of raw materials, to slow sharply, has wiped a total of 115 billion Australian dollars from budget revenues.

Bettina Wassener reported from Hong Kong and Meraiah Foley from Sydney, Australia.

By Bettina Wassener and Meraiah Foley
Published: February 3, 2009

Source: International Herald Tribune

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