Japan injects further 7.2tn yen into economy

| December 8, 2009
Japan injects further 7.2tn yen into economy

In order to prevent the world’s second largest economy falling back into recession, Japan’s Government is to pump a further 7.2 trillion yen ($81 billion; £48 billion) into the economy.

Japan’s economy emerged from recession in the second quarter of 2009 and also experienced positive growth in the third quarter. However, there have been fears that the return of deflation could stall growth.

The Cabinet Office recently acknowledged that deflation had returned for the first time since 2006.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s in which the economy struggled with falling prices.

Furthermore, there have been concerns of a strong yen. The yen’s recent surge to a 14-year high against the US dollar poses a threat to the recovery.

While a strong yen is good news for the economy, it makes Japanese exports less competitive – but means imports are more affordable to Japanese consumers. Exports are a key to the economy‘s recovery.

Meanwhile, commenting on the stimulus, the Government said: “We must present an economic package promptly in order to make the economic recovery solid in the face of the current severe economic and employment situation, the yen’s rise and deflation.”

“We will do our utmost to regain Japan’s vigour,” it added.

However, many analysts believe the further stimulus highlights the fragility of the economy and according to Yasunari Ueno, chief market economist at Mizuho Securities, “it doesn’t even begin to address the more fundamental issues facing Japan, such as weaknesses in the global economy and deflation.”

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