After much hesitation, Junichiro Koizumi's government has finally agreed to work on a second supplementary budget. More than ever, Japan's intrepid prime minister appears to be caught in the crossfire between the necessity to rationalize public spending and the obligation to shore up a flagging economy.
The case for government intervention, however, has strengthened recently. All components of demand are displaying weakness. Consumers are restraining their spending in light of rising unemployment. Exports continue to suffer from the global slowdown. More importantly, corporate investments -- the driving factor behind variations in gross domestic product over the last decade -- have sharply declined.
Under such conditions, it seems opportune that the government fill up the vacuum left by a retreating private sector. For a change, Japan will have the blessing of a critical ally. Even the supply-sided U.S. administration has expressed its support for higher public spending in an attempt to ward off recession.
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