The Japanese government announced a new $81 billion stimulus package Tuesday, in a bid to keep the world's second-largest economy on track for recovery.
Though the Japanese economy has grown for the past two quarters, "domestic demand is still very low," warns Martin Schulz, an economist with the Fujitsu Research Institute, a think tank in Tokyo. "To pull the economy out of recession, they need more private demand."
The new stimulus package is designed to boost consumer demand, offering incentives to buy eco-friendly cars and appliances and expanding credit and subsidies to small businesses to stop them shedding jobs, among other measures.
Warnings of a second slump
Japan was the first country to fall into recession when last year's financial crisis hit, and it was the first to pull out of its decline. Prime Minister Yukio Hatoyama, however, warned recently that the Japanese economy faced the threat of a "double dip recession."
Only more state aid, in the form of a new stimulus package, could avert that prospect, he said.
Nagging at the heels of the recovery is the threat of deflation, which lay at the root of Japan's "lost decade" of economic stagnation in the 1990s. Prices fell 2.2 percent in October, faster than at any time in half a century, setting off alarm bells.
Deflation, which encourages consumers to put off making purchases, eats into growth by cutting companies' profits. That prompts them to cut wages and lay off workers, further dampening demand.
Yen soars, hurting exports
Compounding the problem is the high value of the Japanese currency, the yen, which hit its highest rate against the US dollar in 14 years last week. A high yen increases the cost abroad of Japanese exports, a pillar of the Japanese economy.
Recent yen values "are unsustainable for doing profitable business and making further investment," says Dr. Schulz.
After plunging by 49 percent in the first half of 2009, Japan's exports fell in October at their slowest rate for a year, buoyed by strong demand in Asia.
But demand in other major markets, such as the US and Europe, has been rising more timidly, and Japanese exporters of cars and electronics are finding it hard to compete in international markets with South Korean companies such as LG and Hyundai, who are benefiting from the low value of the South Korean won.
Japan is not the only major economy to feel the continued need for special injections of cash. The Chinese government said Monday it would continue to disburse funds from the $570 billion stimulus package it announced last year, and US President Barack Obama is considering using up to $200 billion of money left over from the government's bank rescue plan to boost job creation.