* Japan PM Aso says economy worsening rapidly

* Govt to sell over Y10 trln new bonds to pay for stimulus

* $154 bln stimulus spending plan seen boosting GDP 2 pct pts

* Markets see major new issuance, steepen bond yield curve

By Yuzo Saeki

TOKYO, April 10 (Reuters) - Prime Minister Taro Aso said on Friday Japan's economy was in crisis, as he formally announced government plans to spend $154 billion to help lift the country out of its deepest recession since World War Two.

"Japan's economy is worsening rapidly with exports and production tumbling. Job conditions are also deteriorating sharply," Aso told a media conference.

"Japan's economy can be described as being in a crisis."

Finance minister Kaoru Yosano said the government would issue more than 10 trillion yen ($100 billion) in new bonds to pay for the package, which would raise total issuance this year by at least a third to a record 44 trillion yen.

The government said the 15.4 trillion yen ($154 billion) in new stimulus spending was equivalent to 3 percent of GDP and was expected to push up real economic growth by 2 percent in the financial year to next March. It is the fourth such package in the past year and brings stimulus spending to around 5 percent of GDP as Japan battles a deepening slump with the global financial turmoil shrivelling demand for its cars, technology and other manufactured exports.

A senior government cabinet minister said this week he expected 10-11 trillion yen in additional new bonds to be sold, which would raise issuance by a third to a record 44 trillion yen this year.

Worries about the government's need to issue much more debt and the accompanying rise in long-term rates have caused a sharp steepening for the government bond yield curve.

The spread between the two- and 20-year yields reached 170.5 basis points earlier this week, its widest level in three years, although it has come back to 165 basis points.

The benchmark 10-year yield touched a five-month high of 1.490 percent on Friday but closed lower ahead of the announcement, at 1.450 percent.

Japan's government debt is already the highest among industrialised nations at about 150 percent of gross domestic product, prompting some lawmakers to warn there is a limit to how much stimulus it can afford.

Japan's economy tumbled 3.2 percent in the last quarter of last year and plunging business confidence has raised fears the situation is getting worse.

The world's No.2 economy has been more severely hit by the global recession than other major economies due to its heavy dependence on exports.

But other major economies are not immune, with the United States announcing a $787 billion stimulus package and European Union countries planning fiscal stimulus of 3 to 4 percent of GDP.

The government's stimulus efforts may yet face a rocky ride in a divided parliament, where the opposition controls the upper house and can delay legislation.

Prime Minister Taro Aso said on Thursday that the timing of a general election that must be held by October would depend on how opposition parties cooperate in implementing the stimulus plan.

Previous plans to respond to Japan's dire economic situation have been delayed by the parliamentary deadlock.

Aso has said he might call a snap election if the opposition delays enactment of budget bills needed to fund the stimulus package.

A senior official in the main opposition Democratic Party said on Friday his party had no plan to drag things out unnecessarily.

"It seems that Prime Minister Aso wants to link this issue with the election. We don't think it is necessarily desirable to resist and needlessly take time under these economic conditions," Yukio Hatoyama said in a news conference.

But an economist warned that expectations of an election could prompt lawmakers to try to earmark spending for their constituencies in an attempt to win voters' favour.

"As the lower house must hold an election by this autumn, there is a greater chance that public works projects backed by political interests could be included in the stimulus plan," said Yasuhiro Onakado, chief economist at Daiwa SB Investments. ($1=100.21 Yen) (Additional reporting by Yoko Kubota ( KUB - news - people ); Editing by Michael Watson)

What the new top diplomat will--and won't--get out of her Asian tour.

Hillary Clinton, breaking recent tradition, will go to Asia on her first trip abroad as secretary of state. Beginning the middle of this month, she will visit Japan, Indonesia and South Korea. The last stop on her itinerary will be China. China was also the last stop on Madeleine Albright's maiden trip in 1997 when she started in Europe and worked her way east. Both Condoleezza Rice and Colin Powell visited Europe and the Middle East on their first foreign visits.

Rich in symbolism, first trips are always important. To her credit, Mrs. Clinton is making Tokyo her initial stop. As she told the Senate last month, "Our alliance with Japan is a cornerstone of American policy in Asia."

Despite their importance, the Japanese have come to doubt their relationship with the U.S., and ties became strained toward the end of the Bush administration. They were worried about many differences they had with Washington--such as those over North Korea--but their real concern was that America would eventually abandon them in favor of the giant next door.

Indeed, it was Mrs. Clinton's husband who started the "Japan passing" fear by going to Beijing in 1998 and skipping Tokyo. The State Department, always concerned about angering the Chinese, said that Mrs. Clinton chose Tokyo for her first stop due to "scheduling" reasons, but that's not how the rest of the world sees it.

Yet few outside Japan will be watching when the secretary of state touches down in Tokyo. For one thing, Japan looks like it is in the midst of a historic political transition. The odds are that both Prime Minister Taro Aso and his Liberal Democratic Party will be out of power by September, the deadline for the next election for the Diet's lower house.

The Jakarta and Seoul stopovers will also be largely ignored by the global community. It is only when the planet's lone superpower pays a visit to its most populous nation that the world will start paying attention.

The meeting, though, is less important than most observers assume. Just about every American these days worries that China will stop purchasing Treasury debt, which will be issued to fund the Obama administration's planned stimulus package--and its other spending requirements.

The Chinese have played upon this American anxiety, most recently at the end of last month when Premier Wen Jiabao, speaking in London, suggested that President Obama would like to know what Beijing will do in this regard.

Yet there is not much Mrs. Clinton can say to her Chinese hosts that will affect how much U.S. Treasury debt they decide to purchase. As a practical matter, Beijing needs to park most of its dollar earnings from exports in safe dollar-denominated instruments. And as Chinese exports fall--forecasts for last month indicate they dropped 14% after recording declines in November and December--Beijing will buy fewer Treasuries. Mrs. Clinton, to avoid signaling that Beijing has leverage, could surprise the Chinese and skip this topic altogether.

There are other issues to talk about, of course, but, as the Bush administration discovered after seven years of intensive discussion, it is unlikely the Chinese can be persuaded to do anything they would not otherwise have done on their own.

For example, China does not look like it will substantially change long-held policies supporting the regimes in Iran and North Korea. Chinese currency tactics are largely set, as are positions on the Doha Trade Round and access to China's domestic markets. And there will be no movement on Taiwan.

Human rights, a perennial topic, is almost beyond discussion these days as Beijing has dug in its heels. Unless Mrs. Clinton is prepared at this early stage to make drastic concessions or apply unprecedented pressure, she will not make significant progress this month.

There are a host of things China wants--a giveaway of environmental technology is on the list, as is more information sharing with the Pentagon--but the better strategy is to have the Chinese come to Washington to ask for them, rather than have Mrs. Clinton go to China to hand them out.

The Obama administration has not even named its ambassador to Beijing or had time to formulate China policy, so the secretary of state's trip to the Chinese capital looks premature. In fact, it appears as if the new top diplomat is going to Beijing at this moment less to pursue policy objectives than to get a head start on consolidating her grip on China policymaking inside Washington.

Mrs. Clinton's most important scheduling mistake is not that she's going to China, however. It is the stopover that is not on the itinerary. If she wanted to go to Asia early in her tenure--and that is a generally sound strategy--she should have reserved time for New Delhi.

India shares values with the U.S. as well as strategic goals. The relationship is promising, and there is much to discuss. The secretary of state would be surprised how much she could advance relations with the Indians—and how much progress she could make with the Chinese if they saw her talking to the nation they fear the most.

Is America Going The Way Of Japan?

There are differences--but also worrying similarities.

William Pesek, a savvy Asia columnist for Bloomberg, reports, in his latest column, views about the structural crisis faced by Japan that I first outlined in a 1996 paper, "Japan's Economic Crisis." Thirteen years later, Japan is entering another severe slump, one that looks like even worse than that of other advanced economies. In the U.S., Europe and some other advanced economies, along with China, the second derivative of growth and of other economic indicators is approaching positive territory (i.e., growth is still negative, but GDP may be falling at a slowing rate). In Japan, it is still highly negative. There, the fall is accelerating, resembling a free fall--a severe case of stag-deflation.

The sad case of Japan's free fall is a cautionary tale of what happens when a high-flying economy has a real estate and equity bubble that goes bust, avoiding (for too long) doing the painful structural reforms and clean-up of the financial system that is necessary to avoid a lengthy, L-shaped near-depression. Japan had over a decade of stagnation and deflation, then a mild, sub-par growth recovery that lasted only three years, and is now spinning into another severe stag-deflation.

Keep alive zombie banks and zombie corporations with balance sheets and debts that haven't been restructured, as in Japan, and you end up in an L-shaped near-depression.

Let me explain why the U.S. and the global economy face the risk of an L-shaped near-depression if appropriate policy actions are not undertaken.

First, note that Japan made many policy mistakes that the U.S. should and could avoid. Japan cut policy rates two years after the bust of its asset bubble, while the U.S. eased monetary policy aggressively after August 2007. Japan went into quantitative easing and reversed its zero interest rate policy too slowly; it waited two years after the bursting of its bubbles to do a fiscal stimulus (and reversed it too early with a consumption tax). The U.S. did one--albeit a failed one--last year, and is doing another large one now. Japan created a convoy system of zombie banks and corporations that were restructured too late, while the U.S. may become more aggressive in cleaning up the financial system. Japan had structural rigidities, like lifetime employment, that slowed down the adjustment, while the U.S. has flexible labor markets, with workers who have lost jobs moving fast to new sectors and regions where jobs are abundant.

But by many measures, the U.S. started its financial and economic crisis in much worse shape than Japan. Indeed, Japan was in much better macro and financial shape than the U.S. before and during its stagnation. Japan had the benefit of high household and national savings rates and low leverage of the household sector, a large current account deficit and a net foreign asset position that allowed it to finance its large fiscal deficit during the stagnation. The U.S., by contrast, has had near-zero household savings and massive leverage for years. The U.S. carries large current account deficits and is the largest net foreign debtor in the world, relying on the kindness of strangers, or--more accurately--on the kindness of its strategic rivals (China, Russia) or unstable petro states to finance its twin fiscal and current account deficits.

The U.S. may make some of the same mistakes as Japan and suffer similar macro policy constraints that could limit its ability to more rapidly resolve the financial crisis. First, monetary policy, however aggressive, is like pushing on a string when you have a glut of capacity, credit and insolvency, rather than just illiquidity problems.

Second, fiscal policy has its limits for a nation that is already the biggest net debtor and net borrower, one which needs to borrow $2 trillion net ($2.5 trillion gross) to finance its fiscal deficit. Every other country (including the U.S.' traditional lenders and creditors) is now running large fiscal deficits with the risk of a sharp back-up in long-term interest rates once the tidal wave of new U.S. Treasuries hits the market.

Third, the U.S. is taking an approach to bank recapitalization and cleanup that looks more like Japan--a convoy system and a delayed true cleanup, as the necessary pain to shareholders and unsecured creditors of banks is avoided or delayed--than like the successful outright takeover and nationalization process Sweden has chosen.

Fourth, the market-friendly, case-by-case approach to the necessary debt reduction of insolvent private non-financial agents--corporate for Japan, households for the U.S.--will be too slow. A systemic debt overhang requires across- the-board debt reduction that is not politically feasible, at this point, in the U.S.

Thus, even if the U.S. were to do everything quickly and correctly (in terms of monetary, fiscal, bank cleanup and household debt reduction) we would still have a severe two-year U-shaped recession, lasting until early 2010. The weak recovery of growth, 1% or so, continues to feels like a recession even after you're technically out of it, until 2010-2011. But if the U.S. does it wrong, this severe U-shaped U.S. and global recession may turn into a nasty, multi-year, L-shaped near-depression like that experienced by Japan.

We don't have to go back to the Great Depression (when output fell over 20% and unemployment peaked over 25%); even a stag-deflation and near-depression like that in Japan would be most severe for the U.S. and the global economy. And while six months ago I was putting the odds of this L-shaped near-depression at 10% or so, they have now risen to one-third.

Time is of the essence, and the clock is working against U.S. and global policymakers. The time to stop dithering has long passed; the time to implement a program of forceful, coherent, credible, globally coordinated monetary, fiscal, financial clean-up and debt-resolution policies is now.

The U.S. and global economy are truly risking a near-depression if the policy reaction is not bold, aggressive, sustainable and credible.

* Industrial output drops a record 8.1 percent

* Consumer inflation slows to 1 percent, below forecast

* Economics Minister doubts quantitative easing will work

* Wage data shows job market shrinking

By Hideyuki Sano

TOKYO, Dec 26 (Reuters) - Japan's factories slashed output at a record pace in November in the face of a global economic slump, and core inflation fell faster than forecast, putting the country on course for its second spell of deflation this decade.

With collapsing export orders pummelling manufacturers, the job market is shrinking, threatening to crush consumption and depress prices barely six months after the narrowest measure of consumer inflation popped above zero.

TOKYO, Japan (CNN) -- Beset by economic worries and loneliness, elderly Japanese are turning to petty crime in increasing numbers, the nation's Justice Ministry reports.

An elderly man walks away from a Tokyo grocery store after being observed stealing medicine for an upset stomach.

In 2007, 48,605 persons age 65 and older were arrested in crimes other than traffic violations, more than double the number five years earlier, according to a ministry report.

Thefts such as shoplifting and pick-pocketing were the main offenses, the ministry report said.

"The main reasons they shoplift are poverty and loneliness," said Kazuo Kawakami, a former federal prosecutor. "The traditional Japanese family is gone, and now our elderly live alone."

Morio Mochizuki, who heads SPUJ, one of Japan's largest security firms, said the stories of shoplifting suspects at the thousands of stores his company oversees across Japan bear that out.

And the problem becomes more acute during New Year holidays, traditionally a time for family gatherings in Japan, Mochizuki said.

Economics also plays a role. Japan's economy went into recession this year, the government says. And the country's national pension system has been bogged down with mismanagement and corruption, leaving many pensioners with fears their lifetime savings will be lost.

"I feel sorry for them. When I talk to them, they don't have enough money for food," Takayuki Fujisawa, an employee of SPUJ, said of the elderly he's caught shoplifting.

SPUJ recently allowed CNN to follow its security team at one Tokyo grocery store. In just moments, they nabbed a 69-year-old woman, allegedly trying to steal food worth about $10.

Japan's central bank concluded Friday that near-zero interest rates would not be enough to stimulate lending and has taken the extra step of buying corporate debt as well. But the measures are unlikely to bring the yen down from decade highs, a problem which continues to batter Japanese exporters. The central bank also made clear that for all its pro-activeness, Western economies would need to improve to brighten Japan's fortunes.

Following in the footsteps of the U.S. Federal Reserve, the Bank of Japan cut its key overnight lending rate to 0.1%, from 0.3%, in a 7-1 board vote. It also said it would temporarily buy commercial paper, or short-term corporate bonds, but did not specify how big the program would be or how long it would last.

The additional measures "were necessary for the effects of extremely low policy interest rates to prevail in financial markets and corporate financing," the Bank of Japan said in a statement.

Though the scale of the program is unclear, buying corporate debt "is quite significant because it's the most aggressive we've seen from the Bank of Japan in terms of readiness to take riskier assets," said Tokyo-based Macquarie economist Richard Jerram. Japanese companies are not as strapped for funds as those in the U.S. but the commercial paper market has struggled in the last two months, and any measures to boost liquidity are welcome, he added.

The government will also buy up to 20.0 trillion yen ($223.7 billion) in shares from banks, which have suffered heavy portfolio losses as the Japanese stock market has lost over 40.0% this year. The program is intended to ease banks' sensitivity to the stock market.

But for all these measures, the health of Japan's economy next year depends on Western economies, whose recessions have battered exports and made overseas lending tight. "Uncertainty in the outlook for the economy to return to a sustainable growth path with price stability has increased," the central bank's statement read. "Much depends on financial conditions in the United States and Europe as well as developments in overseas economies."

It is unlikely that Friday's measures will be enough to keep down the yen, whose 25.0% surge this year to a 13-year high against the dollar has eroded companies' overseas earnings. After the Fed cut rates to 0.25% this week, the yen had been a higher-yielding currency than the dollar because Japan's key rate of 0.3% had been higher than the Fed's benchmark rate for the first time in nearly 15 years.

Though the dollar's plunge below the psychologically significant 90-yen level "has provoked speculation that FX intervention is imminent," "we do not expect a return to the 2001-04 policy of rapid reserve accumulation in order to resist yen appreciation," Merrill Lynch currency strategist Daniel Tenengauzer wrote in a Friday research note. He predicted that the yen would retain its strength over the next six months and then start weakening in late 2009, as an unwinding of the carry trade faded.

The central bank said Friday that it would also increase monthly purchases of government bonds, to 1.4 trillion yen ($15.6 billion), from 1.2 trillion yen ($13.5 billion), in the first increase since 2002.

Sharply lower consumer spending in the United States and other high-income countries is stalling global trade, causing a surprise downturn in exports from China that is dramatically slowing its economy and rippling through other countries that rely on international commerce.

TOKYO, Dec 11 (Reuters) - Japan's Nikkei average slipped 1.2 percent on Thursday, losing some gains made the previous day on a stronger yen and as uncertainty over quick approval for U.S. auto rescue plans pressured recent gainers such as Advantest (nyse: ATE - news - people ).

But some big stocks bucked the trend, with Sumitomo Mitsui Financial Group climbing after a report that it would raise $7.6 billion in capital, much more than earlier plans, while Japan Tobacco Inc jumped on a report that the tobacco tax would not be hiked.

"Japanese stocks had already priced in gains on Wall Street yesterday and investors are discouraged by the yen that has firmed since around the market open," said Yutaka Miura, a senior technical analyst at Shinko Securities.

"Investors also want see how the U.S. auto industry bailout pans out, with approval by the Senate looking a bit uncertain."

The benchmark Nikkei fell 99.42 points to 8,560.82, although it was still above its 25-day moving average. It gained over 3 percent the previous day to book its highest close since Nov. 12.

Optimism that a prolonged global economic downturn will be averted lifted Japanese stocks Thursday, following an aggressive interest rate cut in China and assurances by President-elect Barack Obama for a swift economic rescue plan.

The benchmark Nikkei 225 stock average added 160.17 points, or 2 percent, to 8,373.39 -- its highest level in more than a week. The broader Topix index rose 1.5 percent to 829.03.

A 1.08 percentage point reduction in China's key one-year lending rate announced late Wednesday -- its biggest rate cut since 1997 and the fourth in three months -- helped boost marine transport, steel and machinery issues by alleviating fears of a slump in China's demand for raw materials.

Mitsui O.S.K. Lines Ltd., the world's biggest cargo shipper, jumped 7.4 percent to 478 yen, and construction machinery maker Komatsu Ltd. advanced 4.4 percent to 1,070 yen.

Overnight, U.S. markets reversed losses after Obama pledged he would have an economic plan on his first day in office. After filling more spots on his economic team, Obama declared: "help is on the way." The Dow Jones industrials rose 2.9 percent to 8,726.61.

Securities companies were among the day's biggest winners, with Nomura Holdings Inc. surging 5.3 percent to 680 yen and Daiwa Securities Group Inc. up 6.3 percent at 473 yen.

Still, investors were reluctant to drive stocks much higher amid ongoing concerns about the yen's strength and the latest terrorist attacks in India, said Mitsushige Akino, fund manager at Ichiyoshi Investment Management in Tokyo.

"The U.S. is spending money right now on measures to boost the economy," he said. "If geopolitical risks rise, like terrorism, then it will probably have to spend even more money in response. Then that will only further weaken the dollar."

Japanese exporters in particular have been hit hard this year by the stronger yen, which reduces profits earned abroad and makes their products more expensive in overseas markets.

Shares of Panasonic Corp. declined 4.7 percent to 1,284 yen on speculation that it planned to slash its profit outlook, which it announced after the market closed. Blaming the "rapid appreciation of the yen," the Osaka-based company now expects net profit of 30 billion yen from its previous forecast of 310 billion yen.

The dollar was trading at 95.15 yen from 95.54 late Wednesday. The euro stood at $1.2887 from $1.2889.

Finnish handset-maker Nokia exited Japan on Thursday, jettisoning a tiny slice of a dwindling market as it admitted defeat in the face of the global financial crisis.

"In the current economic climate we have been forced to sharpen our business focus," a Nokia (nyse: NOK - news - people ) representative told Forbes.com. The handset maker will stop selling phones and end marketing activities in Japan, a decision which is likely to cost about 50 jobs. About 350 employees, mainly researchers, will stay on. The company will also continue selling its ultra-high-end range of "Vertu" phones in Japan: these luxury handcrafted phones are tailor-made for recession-proof buyers, at around $5,000-$10,000 a pop.

The news did not come as a surprise -- Nokia's market share in Japan was barely 1.0%. Japan is a very mature market, dominated by local manufacturers and network operators like NTT DoCoMo (nyse: DCM - news - people ). Consumers also have little desire to upgrade and replace their phones. With the country in recession, Nokia was unlikely to want to plow more money into a sinking ship.

"Nokia has bigger opportunities in other markets," said Carolina Milanesi, an analyst with Gartner Research, "not in a shrinking market like Japan."

Shares of Nokia were up 2.0%, to 11.34 euros ($14.63), during afternoon trading in Helsinki on Thursday. Swedbank analyst Jan Ihrfelt did not think the announcement would influence investor sentiment; he told Forbes.com that even rivals like Sony Ericsson were having difficulty making progress in Japan.

A representative of the joint venture between Sony (nyse: SNE - news - people ) and L.M. Ericsson (nasdaq: ERIC - news - people ) said there were no plans to shelve activities in Japan. But she admitted there would be a "shift" to a more research-focused business, creating a "center of excellence" for high-end handset development.

Also on Thursday, Nokia said it had begun shipping its answer to the Apple (nasdaq: AAPL - news - people ) iPhone: its touch-screen 5800 model. Although most of Europe and the United States will have to wait till 2009 before they get their hands on it, markets including Russia, India, Hong Kong and Spain will have the phone before the year is out. As Forbes.com revealed last month, Spanish network operator Telefonica (nyse: TEF - news - people ) will offer the 5800, as well as the iPhone, in Spain.