International Herald Tribune | October 30, 2008
By Bettina Wassener

HONG KONG: Japan announced a new stimulus package on Thursday that includes $51 billion to help households and businesses, the boldest of several measures that officials took to try to stanch the fallout from the global credit crisis, and prompting shares throughout the region to surge.

Hong Kong and Taiwan cut interest rates, after a cut of half a percentage point by interest rates by the Federal Reserve a day earlier.

And South Korea established a $30 billion currency swap line with the Federal Reserve, a measure expected to ease pressure on local banks needing to refinance foreign debt. President Lee Myung-bak of South Korea also said his government would bring forward budget spending and consider beefing up construction spending.

"A harsh storm seen only once in 100 years is raging," Japanese Prime Minister Taro Aso told a news conference as he introduced the second stimulus package in about two months. "Under such circumstances, I am certain that what is most important is to remove uncertainties from the lives of people."

Aso unveiled the stimulus package, which includes 5 trillion yen in new government spending, as signs mount that the world's second-biggest economy is heading into recession and as Japan faces the headwinds of a massive currency appreciation.

Also, who took office last month, said the measures would include tax breaks on mortgages, a bank rescue scheme to allow more than 2 trillion yen in public fund injections, relief for small firms suffering from a credit crunch and 2 trillion yes in benefits for private households.

The fresh package, to be financed by tapping special government reserves, come on top of an 11.7 trillion yen set of measures announced in August, before the current financial crisis exploded following the collapse of Lehman Brothers in mid-September.

On Friday, Japan's central bank will also consider whether it should join its peers across the globe and cut its key rate from an already low 0.5 percent.

The Fed on Wednesday delivered a widely expected cut in its key rate to 1 percent, and left open the possibility of going still lower, warning "downside risks to growth remain."

The Hong Kong monetary authority on Thursday eased its base rate by the same amount to 1.5 percent, and Taiwan cut its key rate by a quarter of a percent to 3 percent — its third cut in about a month. The Chinese central bank had cut lending and deposit rates by 0.27 percentage point on Wednesday, the third cut in six weeks.

In Japan, the Nikkei finished higher, as investors cheered the fact that the yen, whose recent strength has weighed on Japanese exporters' earnings, has eased off highs in the past few sessions. Shares in Singapore, Taiwan and Thailand all rose more than 6 percent.

Meanwhile, the stream of results and data is continuing to paint a bleak picture about the state of the real economy. Mitsubishi Motors, Mazda and Nintendo on Thursday joined the swelling ranks of corporate giants that have slashed their full-year earnings forecasts, while economic data due out in the next days and weeks will spotlight the gravity of the economic downturn and are likely to depress sentiment again.

In a research note on Thursday, Alex Patelis, economist at Merrill Lynch in London, warned of "an onslaught of horrific economic data around the corner." Patelis expects the global economy to grow by 2.1 per cent in 2009, the lowest reading since 2001.

Despite their recent rallies, global stock markets remain well below where they began the year, with the Nikkei 225 still down 32 percent this year.

This has sparked worries about the wider fall-out for Japan's banks, highlighted in a statement by Moody's on Thursday.

The ratings agency said the rapid decline in the Japanese equity market meant the Japanese financial markets and Japanese banks have now been drawn fully into the global credit crunch" through the termination of foreign capital and the dearth of securitizations, and the rapid weakening of the Japanese equity and banking markets, as well as the domestic economic downturn, according to the report.

"We expect that negative developments will exacerbate existing trends in an already weak Japanese economy, which has led to steady deterioration of" corporate credit quality of small and medium sized enterprises for more than a year, Moody's wrote.