World's most indebted economy plans big spending package

Prime Minister Naoto Kan, battling what he called Japan’s worst crisis since the end of World War II, plans a post-earthquake rebuilding package, a step that may worsen the challenge of curbing the world’s biggest public debt.

The northern Tohoku region most affected by the disaster accounts for about 8 per cent of gross domestic product, and is host to factories making products from cars to beer. It also has energy infrastructure including a nuclear power plant that the government said is at risk of a meltdown after an explosion.

Factory shutdowns, power cuts and the impact on consumer confidence may hurt Japan’s GDP for a period of months, while contributing to growth later as reconstruction occurs, economists said. The additional public spending risks hurting demand for Japanese government bonds, said analyst Alicia Ogawa.

Policy makers will need to compile a spending package “over the medium to long-term” to cope with the aftermath of the 8.9-magnitude earthquake and the tsunami it triggered, Chief Cabinet Secretary Yukio Edano told NHK Television. Officials will use about ¥200 billion ($2.4 billion) left over from the budget for the financial year ending March 31 to pay for the recovery effort, he said.

The Ministry of Finance projected in January that government debt will increase 5.8 per cent to a record ¥997.7 trillion ($12.2 trillion) in the year starting April 1. That signalled Kan would break his past pledge to limit bond sales to ¥44.3 trillion a year.

For Kan, the task of assembling a reconstruction plan adds to a burden that includes his failure so far to persuade opposition lawmakers to enact bills allowing the government to sell deficit-financing bonds.