Prime Minister Shinzo Abe’s delay in pushing forward plans to loosen Japanese business rules heightened pressure on the central bank to sustain confidence as stocks extended their slump from last month’s five-year high.
Abe yesterday said autumn will be the soonest his government presents legislation for his growth strategy, which spans health industry deregulation to enhanced cooperation with private businesses in replacing aging infrastructure from waterworks to highways. The program is what he calls the third arrow attacking two decades of malaise, along with monetary and fiscal stimulus.
Set to chair his fourth monetary policy meeting on June 10-11, Bank of Japan Governor Haruhiko Kuroda said in April and last month that the central bank had done everything necessary to spur the economy by pledging to double the monetary base over two years. The risk for Abe and Kuroda is that stock declines persist, sapping investor and public confidence, after the Topix Index fell 15 percent from a May 22 high, capping this year’s gain at 27 percent.
“If the stock market continues to slump and the yen strengthens, Kuroda is going to be under pressure to ease further,” said Izumi Devalier, an economist with HSBC Holdings Plc in Hong Kong. “But he’s been very clear that he’s not going to do piecemeal stimulus and reacting to market moves now would only heighten expectations for more of the same in the future.”
The Topix fell 3.2 percent yesterday, while the yen gained 0.5 percent to 99.56 per dollar as of 6:47 p.m. in Tokyo, paring the currency’s decline this year to about 14 percent.
According to HSBC, major additional stimulus is unlikely to be debated by the BOJ before October at the earliest. Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo and a former central bank official, said yesterday that the central bank had only just delivered its “big bang” two months ago.
Goldman Sachs Group Inc. said the main theme of next week’s meeting may be improving communications surrounding the intention and impact of new BOJ policies, with officials also likely to consider extending the term of funding operations to two years from one to counter bond-market volatility.
Ten-year yields were at 0.855 percent yesterday from a record low of 0.315 on April 5.
The BOJ should urgently stabilize long-term rates to avoid damaging the “precious positive trend that has developed in the economy,” Naohiko Baba, chief Japan economist at Goldman, wrote in a note.
Proper implementation of the growth strategy will counter “stock market wobbles,” Economy Minister Akira Amari said yesterday in Tokyo.
The timing means Abe is putting off taking on vested interests until after next month’s election for the upper house of parliament. He vowed yesterday to deregulate the energy, health and infrastructure sectors and double foreign investment in Japan to 35 trillion yen ($352 billion) by 2020.
Abe said he will raise investment in the power industry to 30 trillion yen in 10 years and triple to 12 trillion yen the use of public-private partnerships to fund infrastructure projects such as airports, waterworks and highways over the same period. He didn’t address changing labor laws to make it easier to fire workers.
“This will encourage all kinds of constructive private sector activity and spark international innovation within Japan,” Abe said. “Deregulation is the cornerstone of the growth strategy. Japan has regulations that are out of sync with the times.”
Details on the most-needed reforms will be announced by the end of August, according to a draft of the government’s growth strategy released by the Industrial Competitiveness Council hours after Abe’s speech. The panel, which includes Cabinet members and business leaders, recommended restarting nuclear plants that get approved as safe by the Japan Nuclear Regulation Authority.
Tokyo Electric Power Co., operator of the Fukushima Dai-Ichi nuclear plant, tumbled 16 percent after Abe’s speech, which excluded any reference to when Japan may restart atomic reactors idled after the March 2011 disaster.
Yesterday’s draft included detailed objectives, while stopping short of spelling out how the goals will be achieved. Officials want to double exports from small and medium-sized companies by 2020, and more than double shipments of agricultural products. Farming will be overhauled to reduce the role of small-plot growers, with 50,000 agricultural corporations by 2020.
The growth plan will be put together on June 12 and be approved by the Cabinet on June 14, Deputy Chief Cabinet Secretary Hiroshige Seko said in an interview this week. The strategy will take time to implement and show results, Seko said.
The draft plan set a goal of 2 percent annual average increases in gross domestic product over the next decade, adjusting for changes in prices. Real GDP averaged 0.8 percent growth for the past two decades, according to the International Monetary Fund. Nominal GDP was targeted for 3 percent gains.
Seko said Abe is still considering lowering corporate tax rates, a topic that wasn’t addressed in yesterday’s speech. The government is examining Economy Minister Amari’s suggestion of lower taxes in special economic zones, which may be created in a bid to encourage innovation.
Hiroshi Mikitani, president of online retailer Rakuten Inc. and a member of the panel that published the draft growth strategy, complained in a statement yesterday that the document excluded reference to the tax system.
Another panel member, Heizo Takenaka -- who earlier this decade led efforts to resolve Japanese banks’ bad-loan crisis -- said that proposed changes for highly regulated areas such as agriculture, healthcare and the labor market weren’t sufficient. In a statement, he also said that questions remain on how implementation of the recommendations will be checked.
Meantime, the government will set up a panel of experts to examine asset management by the public pension system and quasi-public organizations. The group will report by autumn and will look at such issues as improving returns from long-term investment in stocks, risk control, and diversified investment, yesterday’s draft said.
Japan’s childcare market needs urgent changes to solve the lack of urban pre-schools, and environmental assessments for coal-fired power stations need to be simplified, the government’s deregulation committee said yesterday in its first report.