A small step in the right direction

The massive devaluation of most Asian currencies has begun to take its toll on sales of Japan's more expensive products. Yesterday's trade figures, which saw the first fall in its exports to the region for almost three years, demonstrated how Tokyo can no longer rely on its traditional formula of export-led growth to avert the threat of a financial meltdown that would have global repercussions.

That explains why Prime Minister Ryutaro Hashimoto abandoned his previous insistence on budget balancing in favor of this week's surprise package of tax cuts and increased public spending aimed at boosting domestic demand. Not that this alone will be enough to stimulate an economic recovery, despite the surge in Tokyo stock prices which followed its announcement.

Headlines hailing the two trillion yen (HK118 billion) revenue cuts overlook the fact that this only reinstates a similar amount in tax breaks abolished in last spring's austerity package. And since the reductions are only scheduled to last for one year, it is unlikely to result in any significant increase in consumer spending. At best, the new package will only have the most marginal of effects on economic growth. Perhaps sufficient to avert a crash, but certainly not enough to help Asia back on the path to sustained growth.

Thursday's announcement of a further stimulus package by the ruling Liberal Democratic Party amounts to little more than a revamped version of old proposals.

The reason why such modest measures have aroused so much excitement in the financial markets is that Mr. Hashimoto's jettisoning of his previously tight fiscal stance has aroused hopes that more substantial expansionary measures may follow.

In most countries, a policy of reducing the budget deficit and preparing for the burden imposed by an aging population would be seen as prudent. But Japan is an exception to this rule. With Asia -- and the world -- on the brink of recession, it cannot risk accelerating this process by continuing its policy of austerity.

This week's measures are a small step in the right direction. But they will have to be followed by others, such as deregulation and market opening, if they are to have any lasting impact.

-- South China Morning Post