Japan spending plans may push economy into recession

(For more stories on the Japanese economy click [ID:nECONJP])

TOKYO, Oct 16 (Reuters) - Japan's new Democratic Party-led government's plan to slash public works spending as a way to redirect money to its other plans could push the economy back into recession.

The impact of the new government's plans could be exaggerated by the fact that former Prime Minister Taro Aso had aimed to increase spending on public works projects by 5.7 trillion yen ($64 billion) overall as part of a round of stimulus spending.

That hike would have capped a decade-long slide in public construction spending and was forecast to have pushed up gross domestic product (GDP) by 0.6 to 0.8 percentage point in the fiscal year that ends next March, according to economists.

"What the new government is trying to do is to totally change the budget structure and this involves strains," said Mitsumaru Kumagai, senior economist at Daiwa Institute of Research.

"Japan may see modest minus growth in GDP in October-December and January-March," he said.

The new government has found programmes worth 2.9 trillion yen ($32 billion) that it says should be scrapped to cut wasteful spending in the 14 trillion yen extra budget the previous government compiled. [ID:nT127421]

This includes 500 billion to 1 trillion yen's worth of public works projects, economists say.

As a result, GDP for fiscal 2009/2010 will be reduced by 0.1 to 0.2 point, according to Kumagai, possibly widening a contraction of 3.2 percent forecast for the year based on a Reuters poll. [ID:nLAG003839]

"The economic recovery may stall as personal consumption is not strong enough to make up for a loss in public spending," said Naoki Iizuka, senior economist at Mizuho Securities.

The Democrats, who came to power after a sweeping election win in August, are trying to come up with some 7 trillion yen for funding its spending programmes aimed at putting more money in the hands of consumers, including child allowances.

Such programmes are unlikely to benefit the economy fully until fiscal 2011/2012, economists say.

More negative impacts on the economy are foreseen in the meantime, as Democrats plan to cut spending on public works projects, which totaled roughly 18 trillion yen in fiscal 2008/2009, by 20 percent over the next five years and 30 percent over 10 years.

Japan's GDP grew 0.6 percent in April-June from the previous quarter for an annualised 2.3 percent gain after shrinking sharply for four straight quarters, the longest such spell on record.

"Since the change of government, worries have been growing about a double dip in the economy," Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said in a report. "The dip may be created by reduced support from the government and cuts in bonus payments," he said. ($1=90.65 Yen) (Reporting by Rie Ishiguro; Editing by Hugh Lawson)