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Oct 31, 2014 4:11 AM

Q&A: Why Japan's economy needs more juice

The Associated Press

TOKYO (AP) Japan is pumping more money into its lagging economy, expanding an already lavish stimulus effort. The surprise announcement Friday highlights diverging fortunes among the world's top economies. Earlier this week, the U.S. Federal Reserve ended its own unprecedented stimulus in a sign of increased confidence in economic recovery.


The Bank of Japan is increasing its annual purchases of government bonds and other assets by as much 20 trillion yen ($91 billion) to 80 billion yen ($725 billion). It hopes to spur more lending, spending, investment and inflation by increasing the amount of money in circulation. The Fed's bond buying program totaled $4 trillion, much bigger than the BOJ's program but it is still significant relative to the size of Japan's economy.


Japan's recovery shuddered to a halt after the government increased sales tax from 5 percent to 8 percent in April. It had to because the Japanese government has the developed world's heaviest debt burden. But the hit to growth was worse than expected and officials worry the economy won't bounce back. A 1997 tax increase stalled a recovery from the collapse of Japan's 1980s bubble economy. BOJ Gov. Haruhiko Kuroda says "whatever we can do, we will," to counter a deflationary spiral.


The BOJ's decision was not unanimous. Four of 9 members of its policy-making panel voted against the extra stimulus. Markets, however, rejoiced. The Nikkei stock index surged 5 percent. A sustained rise in stock prices could make some Japanese feel richer but any wealth effect faces strong headwinds from an aging and shrinking population. The yen dived against the dollar, which could help Japan's exporters; however the benefits of a weak yen have been diminished in recent years by companies moving production overseas.


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