Prime Minister Naoto Kan, battling what he called Japan’s worst crisis since the end of World War II, plans a post-earthquake rebuilding package, a step that may worsen the challenge of curbing the world’s biggest public debt.
Policy makers will need to compile a spending bill “over the medium to long-term” to cope with the aftermath of the 8.9- magnitude earthquake and the tsunami it triggered, Chief Cabinet Secretary Yukio Edano told NHK Television. For now, officials will use about 200 billion yen ($2.4 billion) left over from the budget for the fiscal year ending March 31, he said.
To maintain financial stability, Bank of Japan Governor Masaaki Shirakawa said the central bank will provide “massive” liquidity. The northern Tohoku region most affected by the disaster makes up about 8 percent of gross domestic product, and is host to factories making products from cars to beer. It also has a nuclear power plant the government said is at risk of a meltdown after an explosion.
Factory shutdowns, power cuts and the impact on consumer confidence may hurt Japan’s GDP for a period of months, while contributing to growth later as reconstruction occurs, economists said. The additional public spending risks hurting demand for Japanese government bonds, said analyst Alicia Ogawa.
“A supplementary budget is like the last thing that people watching the JGB market want to hear,” said Ogawa, adjunct professor at Columbia University’s School of International and Public Affairs in New York, and a former Japanese banking analyst who lived in the nation for 15 years. The prospect of rebuilding “signals another leg down in Japan’s fiscal health. So I’m concerned that in the short to medium run, there’s going to have to be more borrowing,” she said.
The leader of the largest opposition party, Sadakazu Tanigaki, told Kan that he would support a temporary tax to help fund relief spending after Japan’s strongest earthquake on record. Edano said later he couldn’t rule out such a measure.
“The prime minister must consider seriously whether funding can be secured by issuing government bonds alone,” Tanigaki told reporters today in Tokyo. He added that the secretaries general of his and Kan’s party will discuss the matter further.
Finance Minister Yoshihiko Noda told reporters in Tokyo that it will be “difficult” to compile the extra spending package before month-end.
The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1. That signaled Kan would break his past pledge to limit bond sales to 44.3 trillion yen a year. U.S. government debt held by the public is less than $10 trillion.
For Kan, the task of assembling a reconstruction plan adds to a burden that includes his failure so far to persuade opposition lawmakers to enact bills allowing the government to sell deficit-financing bonds in the coming fiscal year.
Japan’s bond market has so far failed to signal concern at the fiscal outlook, with more than 90 percent of government debt held by domestic investors led by financial companies. The yield on the benchmark security due in 2021 was 1.27 percent late March 11 in Tokyo, compared with an average of 1.39 percent over the past decade.
Risk to Yields
“Considering that Japan’s sovereign debt was recently downgraded, financial markets may become more wary of even an incremental increase in government borrowing and bond issuance,” Dan Ryan, an economist at Lexington, Massachusetts- based IHS Global Insight.
Japan’s rating outlook was lowered to negative from stable by Moody’s Investors Service Feb. 22 on concern that political gridlock will constrain efforts to tackle the debt burden. The ranking is Aa2, the company’s third highest. Standard & Poor’s cut its grade in January to fourth highest.
Stocks already began to respond to the quake, with the Nikkei 225 (NKY) Stock Average tumbling 1.7 percent by the close March 11, which came 14 minutes after the 2:46 p.m. strike of the main earthquake. Abroad, investors took the quake in stride, with the U.S. Standard & Poor’s 500 Index rising 0.7 percent.
Companies from Sony Corp., Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. to beermaker Sapporo Holdings Ltd. and refiner JX Nippon Oil & Energy Corp. shut down facilities in northern Japan. Cosmo Oil Co. suffered a fire at a refinery in Chiba, outside Tokyo, while Tokyo Electric Power Co. battled to avert a meltdown to a nuclear power station 220 kilometers north of Tokyo after cooling systems failed.
The devastation has caused the death of more than 800 people, according to the National Police Agency. The number in Miyagi Prefecture could rise to 10,000, NHK reported, citing the Miyagi police department. Kan, returning from an inspection of the devastated area around Sendai said he would mobilize 50,000 Self Defense Force personnel to aid the relief effort.
In Tokyo, residents emptied supermarket shelves and steeled themselves for power outages that Kan said in a news conference will start tomorrow.
“The quake and the tsunami are a tragic devastation, but they will have only minimal impact on the Japanese economy overall,” said Michael Boskin, a Stanford University economics professor in Stanford, California, and former head of the White House Council of Economic Advisers. “When there are natural disasters, there’s a big disruption of capital and, tragically, life as well that will require capital to rebuild and so on. But it’s not widespread enough to disrupt” GDP very much, he said.
Provided the danger to the nuclear reactor is defused, “something several magnitudes lower than the 1.9 percent GDP impact” of the January 1995 Kobe earthquake is likely, London- based ING Financial Markets analysts Rob Carnell and Tom Levinson wrote in a note. “One potential fly in the ointment, is that in 1995, although seriously challenged, Japan’s fiscal situation was not in such a parlous state as it is today.”
For its part, the Bank of Japan pledged to ensure financial stability, setting up an emergency task force and saying it will do everything to provide liquidity. Tomorrow, the central bank holds a meeting, bringing its scheduled policy announcement forward one day to speed its reaction to the temblor.
Meantime, the Ministry of Finance may be prompted to intervene in the foreign exchange market should the nation’s currency climb and risk worsening deflationary pressures and undermining export competitiveness, analysts said.
The yen advanced 1.4 percent to 81.84 per dollar March 11, bringing its appreciation over the past year to about 10 percent. The yen typically climbs during crises because Japan’s current- account surplus means it doesn’t need foreign funding and because of the likelihood of Japanese investors repatriating assets. Japan holds $882.3 billion of Treasuries, the highest tally after China, according to the U.S. Treasury.
“Insurance companies are unlikely to buy overseas assets aggressively while they worry about pending claims” stemming from the earthquake, Mansoor Mohi-uddin, the head of global currency strategy at UBS AG who was in Tokyo for visits with clients and present for the earthquake, wrote in a note. He predicted that the yen won’t strengthen past 80, citing the likelihood of authorities selling the currency to stem gains.
The earthquake hit at a point when the economy was pulling out of a contraction in the fourth quarter. Recent data showed factory orders increased 4.2 percent from December, the biggest jump in five months, industrial production rose in January and the unemployment rate held that month at 4.9 percent, matching the lowest level since March 2009.
“This is a Keynesian stimulus program that nobody can argue with: just rebuilding the city of Sendai,” said Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington, co-author of the 2001 book “No More Bashing: Building a New Japan-United States Economic Relationship.” “Rebuilding Sendai could actually be an opportunity to try to create a growth pole in northern Japan.”
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