Australia announced a $26.5 billion stimulus plan and a deep interest rate cut on Tuesday and the Japanese central bank said it would start buying shares held by financial institutions in a bid to ease the burden on lenders, in the latest efforts from policy makers around the world to shield their economies from the worsening economic downturn.

The announcements come amid a flurry of economic data, job cuts and profit warnings from companies in recent weeks that have shown the region is slowing at a much faster pace than had been expected as demand in the United States and Europe – key to Asia’s export-dependent economies – evaporates.
“The weight of the global recession is now bearing down on the Australian economy,” said Wayne Swan, the Australian treasurer, in a statement accompanying the stimulus announcement. “In the midst of this global recession it would be irresponsible not to act swiftly and decisively to support jobs.”
The government measures came as the Australian central bank cut its key benchmark cash rate by a full percentage point to 3.25 percent, the latest in a string rate cuts that takes the country’s cost of borrowing to a record low. Together, the measures are designed to prop up growth in an economy that has seen its main driver – a boom in mining – fizzle amid the global economic downturn.
Craig James, chief economist at Commonwealth Bank of Australia, said the fresh measures were “very positive for the Australian economy,” and that the string of rate cuts represented “the most aggressive easing of monetary policy that Australia has ever seen.”
“We’ve got both arms of the Australian economy, both monetary and fiscal policy, working in unison,” he added, and the combined stimulus measures “should prevent the economy from notching up two consecutive quarters of negative growth, which is the technical definition of a recession.”
Japan, by contrast, is already in recession, and the central bank has already cut interest rates to nearly zero.
On Tuesday the Bank of Japan announced it would purchase of up to ¥1 trillion, or $11.1 billion, of banks’ shares in corporations to shore up banks’ capital and reduce their exposure to the stock market.
The Japanese financial system has remained stable, mainly because Japanese lenders were little exposed to the U.S. mortgage-related troubles that have brought lenders in other countries to their knees.
But the fall in stock prices last year means many Japanese banks have “reported massive realized and unrealized losses, suggesting that coping with market risk associated with stockholdings remains their critical business challenge,” the Bank of Japan said in a statement Tuesday.
As the economic slowdown drags on governments around the world have been forced to beef up the initial stimulus measures they began to announce in October. China, too, is widely expected soon to follow suit with new measures that will complement a massive stimulus package outlined in November.
Economists believe the key priority for the Asia-Pacific region is to reduce its reliance on exports and to stimulate domestic consumption. The head of the International Monetary Fund, Dominique Strauss-Kahn, on Tuesday reiterated this point, saying that it is “impossible for Asia to have a recovery while the rest of the world is in bad shape,” Reuters reported.
James, the economist at Commonwealth Bank of Australia, said the impact of the regional stimulus packages depended on what happens in the United States.
“Once the U.S. authorities start to improve the functioning of the credit system, the financial system, then we’ll start to see confidence return,” he said. “Once we do get improvement in the health of the U.S. financial system, there will be less need in places like Australia to go down this path of stimulus packages.”
The measures announced by Australia on Tuesday comprise 42 billion Australian dollars, or $26.5 billion, in spending on infrastructure, schools and housing, as well as payments for low-income earners. It comes on top of a raft of measures already announced last year as the slowdown in the United States and Europe began to spread around the world and engulf the economies of the Asia-Pacific region.
Swan, the Australian treasurer, said the measures would help stave off recession, though at the expense of causing the budget deficit to swell to 22.5 billion dollars, or 1.9 per cent of GDP.
“Decisive action is now required to strengthen the Australian economy and in these circumstances, a temporary deficit is the only responsible course of action to support jobs and economic growth,” Swan said.
Australia’s economy has benefited hugely in recent years from a global commodity boom that saw oil prices spike to more than $147 a barrel last year. As the global economy ground to a halt, so did the rise in commodity prices.
The Australian government has estimated that the global recession, which has also caused growth in China, a major consumer of raw materials, to slow sharply, has wiped a total of 115 billion dollars from budget revenues.
Meraiah Foley contributed reporting from Sydney.
(Source: iht.com)