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Gillard Backs Abe Reflation Even as Currency Hurts Australia

Photographer: Lisa Maree Williams/Bloomberg

Julia Gillard, Australia's prime minister. Close

Julia Gillard, Australia's prime minister.

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Photographer: Lisa Maree Williams/Bloomberg

Julia Gillard, Australia's prime minister.

Australian Prime Minister Julia Gillard added her voice to global endorsements of Japan’s efforts to revive its economy, even as a sinking yen contributes to undermining her country’s manufacturing competitiveness.

“The Japanese economy certainly does need to take steps to pursue growth, so we are pleased that the new prime minister seems very focused on getting growth,” Gillard said in an interview in Melbourne late yesterday. Her remarks followed the Group of 20’s endorsement last week of Japan’s stepped-up monetary stimulus as something “intended to stop deflation and support domestic demand” rather than weaken its currency.

Japanese Prime Minister Shinzo Abe’s reflation policy has triggered a slide in the yen that left it flirting today with 100 per dollar, a level unseen since 2009, buttressing Japan’s export competitiveness. By contrast, Australia has coped with a local dollar averaging about $1 in the past three years, the strongest performance since the early 1980s.

“We do support free trading of currencies and we have a very freely traded currency and we have to live with a very big currency appreciation as a result -- with all of the pressure that it brings on manufacturing,” Gillard said in the interview, after delivering a speech on ties with China.

Australia’s dollar traded at $1.0224 as of 1:42 p.m. in Sydney, after appreciating 44 percent over the past four years. Japan’s currency was at 98.67 per U.S. dollar, down 18 percent since mid-November, when it became clear that Abe would win national elections and hence a mandate for his reflation policy.

China Policy

Gillard yesterday also refrained from criticizing the exchange rate of China, Australia’s biggest trade partner. Asked whether the yuan was overvalued, the prime minister said that “I won’t be specifying what level any one currency should be at, but philosophically we do look for freer-trading currencies.”

Australia’s unemployment rate climbed to 5.6 percent in March from 5.4 percent the previous month, marking the highest level since November 2009. In the manufacturing hub of Victoria, joblessness climbed to 5.6 percent in March as the state lost 9,300 jobs, the biggest decline among the states and territories.

General Motors Co. (GM)’s Holden unit said this month it will cut about 500 jobs in Australia, citing the local dollar’s strength, and currency devaluations in competing markets.

Japan’s Efforts

Japan, too, has seen its manufacturing sector slide in recent years as overseas demand diminished and exporters struggled with a surging exchange rate that only turned around in November. Factory jobs in December fell below 10 million for the first time since 1961.

Abe and his newly installed central bank chief, Haruhiko Kuroda, have mounted a campaign to end 15 years of deflation and spur growth in the world’s third-largest economy. While the efforts have stoked a rally in Japanese stocks, trade rivals including South Korea have complained at the competitive damage to their companies from the slide in the yen.

Gillard, trailing the Liberal-National coalition in opinion polls ahead of Sept. 14 national elections, is seeking to woo voters with pledges to boost spending on education and disability payments even as tax revenue is hurt by a stronger currency.

This month, she unveiled a plan to increase education spending by A$14.5 billion ($14.9 billion) over six years in what she called the biggest overhaul of school funding in 40 years. New South Wales, the largest state by population, became the first of the nation’s eight states and territories to commit to the plan at a signing ceremony in Sydney today.

Tax Shortfalls

The planned education reforms depend on the state and territory governments -- who will be required to contribute about a third of the cost -- signing up to it by June 30. Improvements in education are “closest to my heart,” Gillard said in an April 11 interview.

“Structural spends need to be matched with structural savings,” she said in yesterday’s interview. “We will be making savings in the budget to support these new expenditures.”

Australia faces years of deficits due to tax shortfalls and declining prices for resources, an independent research group said yesterday. Australia’s state and federal governments may post combined deficits in the next decade of about 4 percent of gross domestic product, or about A$60 billion a year, the Grattan Institute report said. Extra spending on health is the biggest cost, it said.

The budget deficit was A$23.6 billion for the first eight months of the financial year, already A$5.7 billion wider than earlier projected, primarily due to reduced tax revenue and higher personal benefit payments, according to Treasury figures released on April 12.

Swan’s Budget

In its October mid-year review, the government forecast a budget surplus of A$1.08 billion in the 12 months ending June 30. It recorded a A$44 billion deficit last fiscal year. Treasurer Wayne Swan will release the annual budget on May 14.

“We have made the choice that we won’t match that underperformance in the revenue by cutting and cutting and cutting government expenditure,” Gillard said. “The cuts would hurt people and it would be bad for our economy to take too much out of our economy.”

Labor’s support remained at 45 percent on a two-party preferred basis, while Tony Abbott’s coalition held at 55 percent, according to a Newspoll published in the Australian newspaper today, two weeks after the previous survey. Gillard’s satisfaction level rose 2 percentage points to 30 percent.

The survey of 1,129 people taken April 19-21 had a margin of error of plus or minus 3 percentage points.

To contact the reporter on this story: Soraya Permatasari in Melbourne at soraya@bloomberg.net

To contact the editor responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net

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