To confront the Global Economic crisis emerged from subprime mortgage loans, global leaders have agreed to take cooperative actions to restore the economy. In this speech, I would like to compare the policy responses of the United States and Japan, and explain its contents and effects on the economy.
The United States introduced the $787 billion stimulus package to confront the economic crisis emerged following the collapse of the Lehman Brothers. Since the size of the Japanese economy is approximately half of the United States, Japanese stimulus package should have at least 30 trillion yen in order to have the same order of impact.
Let's look at the Japanese economic stimulus package. We have already introduced 3 economic stimulus plans of total 75 trillion yen. It was said to be the largest economic stimulus package in the world. The package was financed by 1st and 2nd supplemental budget of 2008, and fiscal 2009 budget. It includes plans such as reductions on highway tolls, fixed-sum stipend, and measures to support employment.
However, fiscal measures, or the actual government spending, of this fiscal stimulus were only 12 trillion yen. As I have pointed out earlier, if Japan wants the same level of economic stimulus as the United States, it would need at least 30 trillion yen, which means additional 20 trillion yen government spending. Therefore, the government is now proposing an additional stimulus package with 15 trillion yen government spending. If this budget is approved by the Parliament, the total government spending for economic stimulus will be approximately 27 trillion yen. That means Japan has introduced an economic stimulus package as large as the United States. Please see the handouts for the summery of the package.
Despite these political measures to stimulate the domestic demand, the Japanese economy contracted by annualized pace of 12% in the final quarter of 2008. In contrast, the United States only experienced 6% contraction in same quarter. Japanese economy is now said to be facing the deepest recession in the world in terms of GDP.
The main reason for the sudden economic slowdown is the weakening of the external demand. Japanese economy relied heavily on exports, which consisted 16% of GDP. The recent trade statistics show that Japan's exports plummeted to almost half compared with the same month last year. That means that the United States is no longer buying the Toyota cars, which is said to be one of the best cars in the world.
The Output gap in Japan is estimated to be around 20 trillion yen. We must reform our economy to achieve an economic growth led by both domestic demand and exports.
However, it is extremely difficult to carry out these measures with huge amount of public debt. Japanese government debt is estimated to be 170% of GDP. In contrast, the debt-to-GDP ratio in US is 78%. By carrying out the economic stimulus, Japanese debt-to-GDP ratio is estimated to exceed 170%. We must work out how to achieve the fiscal sustainability. Raising the consumption tax, or VAT, is one of the options, but it we have not reached a conclusion yet.
I would also like to introduce another part of the Japanese economic stimulus; financial measures. As I have already pointed out, only 12 out of 75 trillion yen of the economic stimulus is the actual government spending. The rest of the economic stimulus is financial measures. Financial measures include 10 trillion yen to increase in the government's capital participation under the "Law on Special Measures for Strengthening Financial Functions" and 20 trillion yen to for the utilization and strengthening of the "Banks' Shareholdings Purchase Corporation". For further information, please read the handouts.
In case that the economy did not come back to the growth path with these measures, we are now looking forward for a legislation of a plan to set up a public body which would buy a basket of shares such as exchange-traded funds (ETFs) up to 50 trillion yen. If this plan passes the parliament, I believe it would have a certainly have a positive impact on the stock market.
Prime Minister Aso says it would take 3 years for the Japanese economy to recover. I believe it is very important to bring back the economy to the growth path before the year ends.
Thank you very much for listening.