Japan's government has declared war on deflation with the release of a much-awaited economic package. But economists say that the new measures may not go far enough.
Japanese Prime Minister Junichiro Koizumi told his economics team that the new package would be followed by additional policy steps.
The government's anti-deflation package calls for the independent Bank of Japan to undertake monetary policy that will lift the economy and stop prices from spiraling lower. The central bank will hold a policy meeting Thursday.
Even though interest rates are already near zero, the bank may cut them further to try to stimulate the economy, but the bank could buy more government bonds to achieve the same purpose.
The new economic plan also says that the government will take all necessary measures, including financial support of banks, if fears of a financial crisis emerge. Japanese banks are burdened with a huge number of bad debts, which are threatening the health of the financial sector and the overall economy.
To support Japan's weak stock market, the plan also includes new restrictions on short-selling. That practice involves selling borrowed equities in a bet that they can be repurchased later at a lower price.
Ron Bevacqua, senior economist for Commerz Securities in Tokyo, says that the package is designed to keep stocks high, since Japanese banks are big market players. He believes that the plan has little to do with deflation. "What it really is, is an attempt to try and shore up financial markets ahead of the book closing by the end of fiscal year in March," he said. "That is all we are really talking about."
The Japanese government says it will also study measures taken in the United States and Britain to better understand the movement of prices, though it did not give details.
Japan is struggling with its third recession in a decade. Unemployment is at a record high, while consumption is low.
Falling prices, which are the result of excess production and a flood of goods on the market, have eaten into the value of homes and have made debts more costly to service. People are reluctant to spend because they know they can get even better prices in the future.
Economists say they are unsure that the new package will convince Japanese consumers to open their wallets.