Japan’s recovery is poised to slow as a leadership change in the government distracts from pressure on the central bank to step up efforts to defeat deflation, said Morgan Stanley’s Robert Feldman.
“We’re moving into a period of somewhat less bubbly, though not negative” growth, Feldman, head of economic research at Morgan Stanley MUFG Securities Co. in Tokyo, said in a Bloomberg Radio interview with Tom Keene. “Until things settle down with the government, my view is the Bank of Japan will simply maintain the status quo.”
The Bank of Japan, for months pushed by Deputy Prime Minister Naoto Kan to do more to spur growth, has kept policy unchanged since boosting a bank-loan program in March. Kan is now front-runner to become prime minister in a leadership vote by the Democratic Party of Japan today. He will need to choose a Cabinet and prepare for upper house elections due next month.
The central bank may end up being “a little late in taking the next aggressive monetary measures” to beat deflation as it waits to see confirmation of moderating growth, Feldman said.
Japan’s recovery from its worst postwar recession has relied on trade, which made up more than half of the gain in gross domestic product in the first quarter. A slowdown in consumer spending in the period offered a warning that domestic demand may need further policy impetus to be a locomotive for the economy.
A 12 percent tumble in Japan’s benchmark Nikkei 225 Stock Average last month also showed the vulnerability of the nation’s expansion. Equities tumbled on concern that Europe’s fiscal crisis will stall a rebound in global trade.
Even so, the Bank of Japan raised its assessment of the economy last month, saying that it is “starting to recover moderately,” and Governor Masaaki Shirakawa has said the rebound is becoming self-sustained.
Monetary policy will need to step in to help growth because Japan’s public debt load means the incoming administration won’t be able to apply fiscal stimulus, said Feldman, who previously worked at the Federal Reserve Bank of New York and has analyzed the Japanese economy for Morgan Stanley for more than a decade.
“There really is no more room for fiscal policy to become more expansionary -- in fact, it has to become contractionary in order to get the deficit under control,” said Feldman. As policy makers “do that, they have to stabilize the economy” by expanding the central bank’s balance sheet, he said.
Feldman added that Kan, who has also served as finance minister since January, has taken “a very strong stance on the anti-deflation issue” and has “pushed hard on the Bank of Japan.”
“That is a sign of leadership that the Japanese people seem to want at this point,” Feldman said.
Kan, 63, is likely to lead the ruling DPJ after Prime Minister Yukio Hatoyama resigned this week over mishandling talks on moving a U.S. military base in Okinawa. His candidacy for party premier won backing yesterday by Cabinet members including Foreign Minister Katsuya Okada and Transport Minister Seiji Maehara.
Feldman also said that the government needs to enact market deregulation that, together with increased monetary stimulus, could stoke growth. Changes are needed to create business opportunities “for the BOJ’s newly printed money to support,” he said.