Japan Local Economies Threatened as Government Cash Dries Up

Japanese local governments are borrowing from banks to cover their outlays as a political standoff over financing legislation adds to risks for the world’s third-biggest economy.

Hokkaido, the northernmost prefecture, and Wakayama, in the west, face extra interest costs after taking out loans, their finance departments say. Public works spending and subsidies for the poor are in danger as funding dries up, according to Keiji Yamada, governor of Kyoto prefecture and head of the National Governors’ Association.

Disruption to spending by local authorities, which account for about two-thirds of public outlays, could further drag on an economy that is losing steam as exports and industrial production slide. With the central government at risk of running out of money this month, Shinzo Abe, the leader of the opposition Liberal Democratic Party, has signaled that he’ll allow a parliamentary debate on the contentious legislation.

“Running short of funds would yield a severe blow to regional economies which are already weakening as populations decrease and companies shift production overseas,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Co. “They have difficulty standing on their feet and have no choice but to depend on money from the central government.”

Contracting Economy

Japan’s Nikkei 225 (NKY) Stock Average has fallen 12 percent from this year’s high in March as analysts at Morgan Stanley and Barclays Plc say the economy likely contracted in the third quarter and will do so again in the fourth. The benchmark was down 0.3 percent as of 10:38 a.m. in Tokyo today.

The finance ministry last week downgraded its assessment of eight of 11 regional economies as weakness in overseas demand, the expiry of government subsidies for car purchases, and strength in the yen hurt manufacturing. Industrial production fell in September by the most since last year’s earthquake and tsunami.

“The central government recently announced its spending of 400 billion yen ($5 billion) for an economic stimulus package, but we have to remember that 4 trillion yen in tax allocations to local governments have been suspended,” Yamada said. “Can you stimulate economic growth with 400 billion yen of spending when you suspend the allocation of 4 trillion yen? What the central government is doing is just contradictory.”

Seeking Support

The deficit financing legislation covers 38.3 trillion yen, or about 40 percent of budget spending for the fiscal year through March 31. Prime Minister Yoshihiko Noda failed last month to persuade opposition leaders to support the measures without him specifying a date for elections. Noda pledged in August to call an election “soon.”

The parliament needs to pass a bill by November 26 to ensure a smooth government bond auction on Dec. 4, said Chotaro Morita, chief strategist for fixed income at Barclays Plc in Tokyo. Moody’s Investors Service said last week that the political impasse is negative for the country’s debt rating, and that smooth functioning of the bond market is crucial.

Ichita Yamamoto, an upper house member of the main opposition LDP, said last week in an interview that lawmakers are “heading in the direction” of a compromise.

“The LDP has to move first as they rely on support from the regions and from old people,” said Hiroshi Watanabe, a senior economist at SMBC Nikko Securities. “Local economies are weakening across the nation and their revenues are falling.”

Extra Costs

Hokkaido’s short-term bank borrowing since late September will incur an extra 15 million yen in interest and the prefecture pushed forward the sale of 39 billion yen of municipal bonds, according to its finance department. Kyoto prefecture may have to delay a winter bonus payment for its officials, Yamada said.

“Given that the economy is worsening now and many problems need to be resolved, Japanese people want legislators to make decisions,” Yamada said. “If they can’t decide, politicians will lose public trust.

The Bank of Japan (8301) may remain under pressure to add to monetary stimulus after it last week expanded an asset-purchase fund by 11 trillion yen.

Panasonic Corp. (6752), based in Osaka, western Japan, last week forecast the second-highest loss in its history for this fiscal year even after reducing its workforce by 39,000 jobs, or about 11 percent. Automaker Mazda Motor Corp. (7261), based in Hiroshima in western Japan, cut its fiscal-year operating income forecast by 17 percent as sales slumped in China.

Abe has signaled his willingness to allow a parliament debate of the bond bill. He said on Nov. 1 that the party has ‘‘never once said it would refuse to take part in debate’’ and the party is ‘‘cooperating so of course we expect the prime minister to fulfill his promise.’’

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Kyoko Shimodoi in Tokyo at kshimodoi@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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