Japan plans to introduce a new economic stimulus package that includes new spending of at least $100 billion, the country’s finance minister said today (Monday).

Japan’s export-dependent economy continues to struggle as world demand plummets and domestic demand remains weak. The economy shrank by 3.2% in the fourth quarter and analysts expect it will continue to slide throughout the first half of the year. That would make for a record five consecutive quarters of contraction.

To combat the deepening recession, Prime Minister Taro Aso has called for a new raft of stimulus measures that will exceed 2% of gross domestic product (GDP).

“The prime minister has instructed us to compile measures that would include real spending of more than 2% of GDP as we take into account a fall in our economy, which is bigger that other leading nations, as well as the need for international cooperation,” Finance Minister Kaoru Yosano told reporters.

The world’s second-largest economy will contract by 6.6% this year, the most since 1945 and steeper than declines of 4.1% in the euro area and 4.0% in the United States, according to forecasts by the Organization of Economic Cooperation and Development.

The new spending adds to the $119 billion of stimulus spending that has already been announced. The new plan includes the creation of a safety net for non-permanent workers, providing more credit and financing to besieged corporations, and expanding the role of clean energy technology such as solar power, Reuters reported.

There’s also a possibility that the Bank of Japan will broaden the type of bonds it accepts as collateral at the culmination of a two-day policy that started today, according to the Nikkei business daily. The BOJ currently accepts only publicly offered bonds, but could expand that to include municipal bonds and bonds issued privately to financial institutions. Such a move could help regional banks raise capital and boost lending more effectively.

“Regional banks may not hold a lot of government bonds that they could use as collateral, but they do tend to hold a lot of municipal bonds,” Hirokata Kusaba, senior economist at Mizuho Research Institute, told Reuters. “This is a policy designed to improve liquidity at smaller banks and I am sure they would welcome it. It could be seen as a pre-emptive measure the BOJ is considering just in case credit markets start to tighten again around earnings season.”

Japan’s benchmark Nikkei 225 stock index jumped 108.09 points, or 1.24%, to 8,857.93 today. It has now risen in each of the past four trading days.

We’re likely to see a tumultuous period in Japan, at least through the end of the year.

Japan could go up. It could go down. It could do both successively. Whatever price movement it does make, it will have more to do with perception of the new government than anything real happening on the ground.

Luckily, knowing that we’ve got volatile times ahead is enough to make us money. There’s one strategy that’s perfect for times like these: A butterfly spread.

• Butterfly spreads are options trades that bet on the upside and the downside simultaneously, with the losing side losing a little and the winning side winning a lot.

It’s not particularly complex or difficult, and it’s designed for moments exactly like these, when you don’t know where the market’s going but you’re sure it’s going somewhere^[1].

1. ↑ "Japan’s Historic Moment Creates Historic Confusion" Article from InvestmentU

Japan suffered its first trade deficit in nearly three decades in the year through March, but the steep decline in the Pacific nation’s exports is beginning to show signs of abating - an indication that global demand could be stabilizing.

Japan posted a trade deficit of 725.3 billion yen in fiscal 2008, its first full-year trade deficit since 1980. But after reaching 49.4% year-over-year in February, the decline in Japanese exports shrank to 45.6% in March. Exports rose 2.2% on a monthly basis, ending a four-month stretch of record declines.

The drop in exports to both the United States and China - Japan’s two largest markets - eased substantially in March. Exports to the United States fell 51.4% year-over-year in March, versus a 58.4% decline in February.

Traffic data from the California ports of Los Angeles and Long Beach - which together handle about 40% of U.S. container traffic - confirmed the bounce in trade, as it showed shipments increased on a month-to-month basis in February in March.

Meanwhile, Japanese exports to China slumped 31.5% in March, compared with a 39.7% decline the month prior.

“Exports have hit bottom,” said Richard Jerram, chief Japan economist at Macquarie Securities. “The stage is set for a strong rebound in industrial production and exports in the second quarter of 2009.”

Other analysts were less optimistic, however.

“It would be premature to celebrate,” David Cohen, director of Asian economic forecasting at Action Economics in Singapore, told Bloomberg. “There’s no denying the Japanese economy is in its most severe recession since WWII, but at least it’s not spiraling down any more.”

The Japanese economy contracted by 0.6% contraction in 2008, and the International Monetary Fund said yesterday (Wednesday) that it will likely shrink a record 6.2% this year.

The government is also expected to cut its economic outlook, despite plans to spend 15 trillion yen ($150 billion) on stimulus measures designed to boost gross domestic product by two percentage points this year.