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Japan's Uninspiring Bailout

A day after Japan's prime minister unveiled the largest stimulus package in the country's history, the influential U.S. credit-rating agency Moody's Investors Service on Tuesday lowered Japan's credit rating because of too much debt.

The ratings cut, long anticipated by the market, adds more straws to the load breaking Japanese policymakers' backs, raising the cost of borrowing for already cash-strapped companies, and giving foreign banks another reason to raise interest rates when dealing with their Japanese counterparts.

It also pulls the rug from under Prime Minister Keizo Obuchi, who was to tout the giant stimulus package during meetings with President Clinton, who visits Tokyo for two days starting Thursday. U.S. officials have constantly called on Japan to jump-start its economy by fixing the banks and spending the economy into growth.

"At the very least, it's embarrassing," said Michael Wilkins, a dealer at Credit Lyonnais. "The fact of the matter is Japan got a downgrade. The fact of the matter is the cost of funding will go up for many Japanese companies."

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Obuchi had promised the bailout would turn the recession-bound economy around by next year, but analysts quickly said the $196 billion in new public spending and tax cuts would offer only temporary relief.

The package was aimed at stopping the economy from contracting for a third consecutive year, a pledge Obuchi made after taking office in July.

"With this plan, our country can free itself from its current severe situation," Obuchi told reporters Monday before flying to Malaysia for a summit meeting of the Asia Pacific Economic Cooperation (APEC) forum.

Obuchi, who has been under intense international pressure to do more to ease Asia's economic woes, said the spending package also contains $8 billion in aid for the region.

The package surpassed the record $139 billion the government released last April and brings the total amount Tokyo has spent in stimulus since 1992 to close to $820 billion.

Previous spending accomplished little more than keeping Japan's economy afloat and failed to end a stubborn downturn triggered by the collapse of land and stock prices in the early 1990s.

Economists immediately said the results of the new package would likely be more of the same, restoring the economy to anemic growth without addressing Japan's deeper problems, such as its debt-ridden banking system.

"I'm not sure if they've put in place the mechanism" for economic recovery, said Michael Naldrett, an economist at Dresdner Kleinwort Benson (Asia). He said te economy could expand by 1 percent next year with the package.

Japan can use a shot in the arm.

The economy has sunk into its longest recession since the government started keeping records after World War II. It shrank last fiscal year for the first time in more than two decades, and official forecasters say things will only get worse. Unemployment and bankruptcy debts are stuck at record highs.

Obuchi said the package would include more than $147 billion in spending, most of it on public works and steps to help smaller companies ride out a severe credit crunch as Japan's banks dispose of their massive bad loans.

Economists said with Japan buried under a mountain of government debt, it cannot afford to keep on pumping out government spending.

"We need growth which is led by the private sector, not by fiscal spending," said Yoshito Sakakibara, senior economist at Goldman Sachs.

Tax cuts worth about $49 billion will bring Japanese income and corporate tax rates in line with those in major Western economies, Obuchi said.

Another feature of the package is an innovative plan to entice consumers to spend more by distributing $5.7 billion in shopping vouchers. The plan is expected to be passed later this month in a special session of parliament.

Obuchi, however, said the plan did not include a reduction of the 5 percent national sales tax, as investors and opposition politicians have been calling for.

The government's decision last year to raise the consumption tax from 3 percent was widely blamed for choking off a growth spurt and tipping the economy back into recession.

Obuchi said the tax revenue was needed because of Japan's mounting budget deficit.

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