Japan extra stimulus likely, GDP fails to convince

By Stanley White and Tetsushi Kajimoto

TOKYO (Reuters) - Japan's government inched toward agreeing new stimulus measures that could be worth $30 billion on Monday as economic growth is likely to slow next year due to sluggish personal spending and rising inventories.

Economists doubt whether that amount will be enough to push growth up significantly as the Democratic Party-led government will likely fund the stimulus with money cut from a budget compiled by the previous administration.

Japan's massive national debt means the Democrats don't have the leeway to spend much more.

The economy grew 1.2 percent in the third quarter, nearly double the forecast and the fastest pace in more than two years, but that was partly due to stimulus that the previous government enacted. The better-than-expected headline figure also failed to mask signs of weakness in private consumption and factory output.

Top government spokesman Hirofumi Hirano told reporters cabinet ministers will discuss fiscal policy on Tuesday, but that won't lead to an announcement on an extra budget.

The Democrats and their two coalition partners agreed not to put a limit on extra stimulus, Banking Minister Shizuka Kamei said. That contradicted Finance Minister Hirohisa Fujii, who earlier said an extra budget won't exceed 2.7 trillion yen, Kyodo news reported.

The government is likely to declare on Friday the economy has returned to deflation, the Nikkei newspaper reported, as the domestic demand deflator fell 2.6 percent in the third quarter from a year earlier, the largest drop in 51 years.

"The stimulus would come from what they've cut elsewhere, so the effect on the economy could be close to neutral," said Satoru Ogasawara, economist at Credit Suisse in Tokyo.

"Strength in domestic demand will likely continue for the remainder of this year, but we expect some softness in the economy next year."

Japan's gross domestic product (GDP) growth was much faster than the median estimate for 0.7 percent growth and was the largest gain since the first quarter of 2007. It compared with a revised 0.7 percent expansion in the second quarter of this year, which was the first growth in five quarters.

A Reuters poll shows Japan's GDP is expected to slow to 0.1 percent growth in the first quarter next year as stimulus measures fade. The United States and Europe have also emerged from recession but face the same challenge as Japan, namely how to combat weak job creation and downward pressure on prices after stimulus wears off.

MINISTER LEAKS FIGURES

In a headache for Prime Minister Yukio Hatoyama, Trade Minister Masayuki Naoshima leaked the GDP numbers before the embargo time, raising questions about the government's ability to handle confidential information.

December 10-year JGB futures climbed to 138.94 on concern that the economy will lose traction, and then pulled back to settle 0.02 point lower at 138.86.

"The economy is expected to continue to recover as overseas economies improve," National Strategy Minister Naoto Kan told reporters after the data.