Government Help WIth Economy Mixed Bag In Asia

Economic Outlook: Textbook Stuff

By ANTHONY HALL

Should investors cringe or cheer these days when the government -- any government at all -- offers to help a slowly sinking economy?

Japan is a disheartening case in point. The Bank of Japan Monday said it would expand its quantitative easing program by a third. It would also expand its lending and keep its overnight lending rate at a rock bottom 0.1 percent. The government then said it would find a way to spend $10.6 billion as a stimulus measure.

Text book stuff.

The Nikkei 225 index and a host of other Asian markets responded, making solid gains Monday. By Tuesday, investors had other ideas, the Nikkei 225 plunging 3.55 percent on worries the fundamentals have further to go before markets hit bottom.

"The main fear in the market is that we will have some sort of double-dip recession in the second half of this year and into 2011," Philippe Gijsels, head of research at BNP Paribas Fortis Global Markets told The New York Times.

More pointedly, analysts concluded the size of the interventions were not nearly enough with the stimulus program set at about 0.2 percent of Japan's gross domestic product. But political realities suggest mortgaging the future is improbable on its own terms. Governments that are in the red are spending tax revenues that will be collected somewhere down the road -- and lots of it. That means in the future they'll need a larger tax base -- more workers and workers who are doing well. That can be envisioned. But a lot of things can be envisioned.

Japan, dependent on its export business, may well have sent the $10.6 billion to the United States and Europe and investors are aware of this. Japan, in other words, can only do so much before acknowledging businesses are not going to expand when two critical markets are floundering. Practically speaking, there is no such thing as a healthy Japanese economy when unemployment is 9.5 percent in the United States and 10 percent in the euro area.

That said, it is absolutely untrue that more stimulus spending in the United States would be akin to throwing good money after bad. It would be throwing good, useful dollars in the right direction, but it would also be vaguely futile, as the first $787 billion stimulus bill turned out to be.