Japan and China look to fiscal stimulus plans

ASIA'S ECONOMIC powerhouse Japan and its biggest emerging market China have signalled they remain ready to bring their resources to bear as part of global efforts to contain the worst financial crisis in decades.

Japan, the world's second-biggest economy, is reeling from the steepest plunge in business confidence in over 30 years, but it has precious little room to manoeuvre on interest rates as they are already edging close to zero at 0.3 per cent.

Meanwhile China, the world's fourth-biggest economy, has managed to escape recession so far but there are growing fears that it may see a sharper slowdown than previously expected. The fiscal battle is on to make sure that the landing is not too hard, and the government is reaching for its armoury of fiscal stimulus programmes and aggressive interest rate cuts.

The Bank of Japan meets at the end of this week and it is possible it will make a move, similar to one it did a few years back when the economy seized up, called quantitative easing, which basically means flooding the banks with money at zero-interest in order to breathe life into stagnant lending markets and give the economy a boost. The central bank cut rates by 0.2 percentage points in October.

Fears in Japan are that the recession will be the worst since the economic bubble burst in the 1990s. Bank of Japan governor Masaaki Shirakawa even harkened back to a grimmer time than that, the Great Depression.

"The last time the world economy was in severe conditions was 1929 and the years that followed. Things are not completely the same today, but we can say it is in the severest conditions since then," he told parliamentarians, while pledging "appropriate action".

There have been reports that the Japanese central bank was considering buying commercial paper directly from companies to ease their funding crunch.

In China, there are fears of the worst growth in two decades as the slowdown deepens before a 4 trillion yuan (€426 billion) stimulus package announced last month kicks in.

The Chinese central bank has reduced the one-year lending rate to 5.58 per cent from 7.47 per cent in September and dropped quotas limiting lending by banks.

China's capital spending rose close to 27 per cent in the first 11 months of 2008 over a year earlier, but slowing from the first 10 months, prompting fears of a sudden slowdown.

Spending on factories and real estate rose 26.8 per cent in the first 11 months from a year earlier, down from a 27.2 per cent gain through October, the statistics bureau said today.

The data added to news last week that its trade surplus swelled to a record in November, but exports and imports unexpectedly shrank, industrial output grew the least since 1999 in November and sluggish demand globally and domestically pushed inflation down sharply, raising the risk of deflation.