Japan Policy Tinkering Leaves 'Huge' Risk to Growth
Masaaki Shirakawa, governor of the Bank of Japan
Tomohiro Ohsumi/Bloomberg
Masaaki Shirakawa, governor of the Bank of Japan.
Masaaki Shirakawa, governor of the Bank of Japan. Photographer: Tomohiro Ohsumi/Bloomberg
Aug. 31 (Bloomberg) -- Thomas Harr, Singapore-based Asia foreign-exchange strategy head at Standard Chartered Plc, talks about Japan's attempts to stem gains in the yen. Bank of Japan Governor Masaaki Shirakawa and his board expanded a bank-loan program by 10 trillion yen ($118 billion) after an emergency meeting yesterday in the wake of the yen reaching a 15-year high. Harr also discusses the outlook for the Japanese and U.S. economies. He speaks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)
Aug. 31 (Bloomberg) -- Thio Chin Loo, a senior currency analyst at BNP Paribas SA, talks about the options available to Japanese policymakers to curb the advance of the yen. She speaks from Singapore wiith Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)
Aug. 30 (Bloomberg) -- Frederic Neumann, a Hong Kong-based economist at HSBC Holdings Plc, talks about the Bank of Japan's expansion of its bank-loan program and its implications for the yen and the nation's economy. The BOJ will boost the amount of funds in the facility by 10 trillion yen ($116 billion) to a total of 30 trillion, the bank said in a statement after an emergency meeting in Tokyo. Neumann also discusses Federal Reserve monetary policy. He talks with Linzie Janis on Bloomberg Television's "Global Connection." (Source: Bloomberg)
Japan’s limited policy response yesterday to risks facing economic growth after a surge in the yen may leave the recovery dependent on overseas spending.
Bank of Japan Governor Masaaki Shirakawa and his board expanded a bank-loan program by 10 trillion yen ($118 billion) after an emergency meeting in the wake of the yen reaching a 15- year high. Prime Minister Naoto Kan pledged to channel 920 billion yen toward steps aimed at buttressing domestic demand.
The measures won’t alter the outlook for growth, which is poised to slow in the second half, according to economists at Goldman Sachs Group Inc. and Sumitomo Mitsui Asset Management Co. Pressure on Japan’s currency to rise may also be sustained after the announcements prompted the yen to rise from its low of the day yesterday against the dollar.
“Although Japan’s economy will unlikely go into a recession, it may stay in a lull through the first half of next year,” said Hiroaki Muto, a senior economist in Tokyo at Sumitomo Mitsui Asset Management. “Japan needs to cross fingers and rely on overseas demand.”
The yen, which reached the strongest against the dollar since 1995 last week as the U.S. currency retreated because of concern about American economic growth, traded at 84.57 at 9:34 a.m. in Tokyo, compared with as low as 85.91 yesterday after the BOJ announced its emergency meeting, sparking speculation it would act to shore up the expansion.
Stocks Slump
The Nikkei 225 Stock Average tumbled 2.1 percent as investors shrugged off government reports today that showed the recovery remains intact even as it slows. Industrial production unexpectedly expanded 0.3 percent in July from June, when it declined 1.1 percent. Retail sales rose 0.7 percent from a month earlier as hotter-than-usual summer weather spurred shopping.
Japan’s recovery from its worst postwar recession has depended on exports, propelled by Asia, which now makes up a majority of overseas demand for the country’s products. That reliance is unlikely to change given limited prospects for domestic spending with a shrinking population and sustained deflation.
Gross domestic product growth will be more than halved in the final six months of this year, to an annual pace of about 1 percent from about 2.4 percent in January to June, according to Goldman Sachs.
Corporate Taxes
“There are huge downside risks” to the expansion, said Chiwoong Lee, a senior economist at Goldman Sachs in Tokyo. Rather than the “limited” action taken yesterday by policy makers, “what’s needed are measures that lead to innovative steps,” such as reductions in corporate tax rates for industries including technology, he said.
Tax rates for electronics companies in Japan are around 29 percent in Japan, compared with 6 percent in the U.S., Lee said.
Keidanren, Japan’s biggest business lobby, has called on the government to support investment by cutting corporate taxes. Without such a step, companies may plow their record cash holdings abroad rather than at home.
Nissan Motor Co., Japan’s third-largest automaker, began selling a Thai-made compact car in July to counter the rising yen. Panasonic Corp., the maker of Viera televisions, said Aug. 20 it will move part of its plasma display panel production to Shanghai.
Priority for Nissan
“The number one priority is to curb the strengthening yen,” Toshiyuki Shiga, chief operating officer of Nissan, said yesterday. “We hope that the government measures will lead to growth in employment.”
Along with cutting corporate taxes, a bolder step to address risks to growth would be so-called unsterilized currency intervention, said Kyohei Morita, chief economist at Barclays Capital in Tokyo.
Japan hasn’t intervened to sell yen in the foreign-exchange market since 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.
In unsterilized intervention, the BOJ refrains from mopping up the liquidity created by the yen sales through issuance of domestic bills.
The government yesterday also announced the formation of a panel to study the economy, which Chief Cabinet Secretary Yoshito Sengoku told reporters is “highly likely” to include Shirakawa.
Two-Decade Slump
Since U.S. calls for Japan to boost domestic spending rose in the 1980s, a series of Japanese administrations formed groups to suggest ways to strengthen growth, including one led by former Bank of Japan Governor Haruo Maekawa in 1986. Even so, growth has averaged an annual pace of 0.7 percent this decade, down from 1.2 percent in 1991-2000 and 4.7 percent in the 1980s.
“Kan’s ability to engineer co-operation” with the central bank may still bolster markets, Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo, wrote in a note to clients.
Kan told reporters after a meeting with his economic ministers in Tokyo yesterday that the government will spend 920 billion yen on his economic stimulus package, details of which will be completed Sept. 10. Officials will consider compiling an extra budget if needed, he also said.
Political Battle
Kan is locked in a battle to retain his job after the ruling Democratic Party of Japan’s former No. 2 official, Ichiro Ozawa, declared his candidacy to lead the party in a Sept. 14 contest. Kan, who previously served as finance minister, has pledged to cap bond sales in an effort to sustain confidence in the world’s biggest public debt, a commitment Ozawa hasn’t made. Ozawa would be more likely to endorse increased spending, according to Lee at Goldman Sachs.
The extra 10 trillion yen unveiled by the BOJ will be offered in six-month credit, with the term for the other 20 trillion yen remaining at three months. Board member Miyako Suda dissented with her eight colleagues in the vote. She also opposed a doubling of the program to 20 trillion yen in March.
“Uncertainty about the future, especially for the U.S. economy, has heightened more than before, and foreign exchange and stock markets have recently been unstable,” the central bank said. “In these circumstances, the bank judged it is necessary to pay more attention to the downside risks to the outlook for Japan’s economic activity and prices.”
Japanese consumer prices fell for a 17th month in July, a report showed last week. Prices excluding fresh food dropped 1.1 percent from a year earlier. GDP growth slowed to 0.4 percent at an annualized pace in the second quarter from a 4.4 percent rate in the previous three months. The figures, released earlier this month, also showed that China’s economy surpassed Japan’s as the world’s second biggest, behind the U.S., for the quarter.
Returned Early
Shirakawa returned a day early from a U.S. trip to lead yesterday’s meeting, after attending a Federal Reserve conference in Jackson Hole, Wyoming. Fed Chairman Ben S. Bernanke said at the gathering on Aug. 27 that the U.S. is open to further measures if needed to avert another recession.
Any move by the Fed to raise its own liquidity injections risks sending the dollar lower against the yen, overwhelming any benefit from the BOJ’s action, some analysts said.
“Bernanke has the most powerful handgun in the world,” said Nicholas Smith, director of equity research at MF Global FXA Securities Ltd. in Tokyo. “Don’t count on significant weakening of the yen.”
To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net; Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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