UPDATE 3-Japan PM plans new economic stimulus by end-Nov: Kyodo

Tue Oct 16, 2012 3:21pm EDT

Oct 16 (Reuters) - Japanese Prime Minister Yoshihiko Noda plans a new round of economic stimulus by the end of next month as the country has entered a lull, Kyodo News reported, quoting sources close to the prime minister.

The steps are expected to include measures to curb deflation, ease strength in the yen, expand earthquake reconstruction work and relax regulations on businesses, the news agency reported.

Noda will hold an extraordinary cabinet meeting Wednesday to instruct his ministers to map out the plan, Kyodo said.

The Japanese government has downgraded its outlook for the economy three times in a row in its monthly assessment, saying last week there was a weak tone.

The Nikkei newspaper said the Japanese government was considering funding the new stimulus with 910 billion yen ($11.5 billion) set aside in the 2012 budget for economic emergencies and the revitalization of regional economies.

If opposition parties cooperated then Noda would propose an extra budget that could total several trillion yen, the newspaper added.

In the foreign exchange market, the yen did not react to the news, but speculation of more easing from the Bank of Japan had the dollar hitting 78.95 earlier in the global session, its highest level against the yen since Sept. 19.

In afternoon New York trade, the dollar traded at 78.86, up 0.3 percent on the day, according to Reuters data.

"It is not clear what he (Prime Minister Noda) is speaking about," said Daniel Katzive, currency strategist at Credit Suisse in New York. "He could be talking about more measures to support exports or the effects of yen appreciation on exporters."

"I think that is why you do not have much reaction because the market does not see the government as likely to be coming out with a really massive counter measure to yen strength," he said.

Japanese policymakers are concerned that exports may not pick up in time to keep Japan's economy on track for a recovery as Europe's sovereign debt crisis hits global trade and delays a pickup in markets like China.

Of particular concern is the impact on exports of a strong yen, which is trading not far from a seven-month high of 77.11 to the dollar it hit in mid-September.

The International Monetary Fund trimmed its growth forecasts for Japan after factory output fell to a 15-month low in August on sagging sales to top export market China and worsening business sentiment.

There are also fears that the Japanese economy may be hurt by a territorial dispute with China over a group of small islands, which has sparked anti-Japan protests in China and calls for boycotts of Japanese goods.

Noda has decided to take stimulus measures in order to prevent the economy from free-falling and secure his prized policy goal of increasing the 5 percent consumption tax rate from April 2014, Kyodo quoted the sources as saying.

Using funds earmarked in the 2012 budget would not need parliamentary approval but raising bonds to fund it would, the Nikkei said.

To do so, the government would need to win support from major opposition parties, which the Nikkei said would reinforce opposition calls for an election.

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