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Japan Fiscal Impasse Threatens Stimulus to Spur Growth: Economy

Japanese Prime Minister Yoshihiko Noda
Yoshihiko Noda, Japan's prime minister. Photographer: Haruyoshi Yamaguchi/Bloomberg

Sept. 4 (Bloomberg) -- Japan’s political gridlock threatens to curtail the government’s ability to apply fiscal stimulus as a rebound falters in the world’s third-largest economy.

Opposition parties in the upper house of parliament stymied legislation approved in the lower house Aug. 28 that enables the issuance of 38.3 trillion yen ($490 billion) of deficit-financing bonds, seeking to force Prime Minister Yoshihiko Noda into an early election. The government could hit a spending ceiling as soon as October, according to the Finance Ministry.

The freeze may suspend outlays from this year’s budget for the first time, according to Goldman Sachs Group Inc., and limits Noda from proceeding with the supplementary spending package he mooted in July. With economists increasingly seeing an economic contraction this quarter, the deadlock adds to risks facing global expansion that include a so-called fiscal cliff of spending cuts and tax increases in the U.S. at year-end.

“The impasse on deficit-covering bonds may delay the compilation of a stimulus package and would be a drag for the economy,” said Taro Saito, Tokyo-based director of economic research at NLI Research Institute and a past winner of a Japan Center for Economic Research award for accuracy in forecasting. “This is not as severe as the U.S. fiscal cliff but could be said to be Japan’s fiscal slope.”

Stocks Fall

Japanese stocks headed for a fourth day of declines, the longest losing streak in more than a month, on pessimism about the global expansion. The Nikkei 225 Stock Average was down 0.4 percent as of 1:31 p.m. in Tokyo. The yen was at 78.37 per dollar, about 4 percent from its postwar high, underscoring the threat to exporters of a strong currency.

Besides exchange-rate appreciation, Japan’s manufacturers are facing diminishing demand abroad, hurt by the European crisis, China’s slowdown and stunted American growth. A government report yesterday showed capital spending rose 6.6 percent in the second quarter from a year before, less than the 7.8 percent median estimate in a Bloomberg News survey.

Yesterday’s report spurred economists to cut forecasts for Japan’s second-quarter gross domestic product, initially reported at an annualized 1.4 percent gain. Officials may pare that calculation to 0.9 percent on Sept. 10, according to the median of seven projections in a Bloomberg survey.

GDP Outlook

Bank of America Merrill Lynch, Credit Suisse Group AG and BNP Paribas SA see a contraction in GDP this quarter, the first slide since back-to-back declines in the first half of 2011, when Japan was hit by the record earthquake and tsunami.

The Japanese fiscal impasse is an echo of political struggles in the U.S., where Republicans and Democrats have failed to agree on a phased plan to rein in the budget deficit. The split leaves the economy facing some $600 billion of pre-set tax increases and spending cuts at the end of the year.

U.S. manufacturing stagnated in August after shrinking the previous month, a Bloomberg survey indicated before an Institute for Supply Management Inc. report today. In the euro region, producer prices probably rose at a slower pace in July, gaining 1.6 percent from a year before, a separate survey showed.

In the Asia-Pacific region, Australia’s central bank today left its benchmark interest rate at 3.5 percent even after signs the nation’s mining boom is decelerating. BHP Billiton Ltd., the world’s biggest miner, last month mothballed projects valued at more than A$50 billion ($51 billion) by Credit Suisse Group and Deutsche Bank AG.

Second Tussle

This is the second straight year that opposition lawmakers in Japan have held up enactment of the deficit-financing legislation. In 2011, they agreed to its passage only after then Prime Minister Naoto Kan had signaled he’d step down from office.

This year’s struggle comes in the run-up to leadership elections in both the ruling Democratic Party of Japan and the Liberal Democratic Party, which ruled the nation for almost half a century until its ouster by the DPJ in 2009. Key legislation may be enacted in an October session of the Diet that precedes a dissolution of the lower house, Goldman analysts wrote in an Aug. 30 note, the step that precipitates an election.

Credit-rating companies have repeatedly cited failure of political leadership as a danger to Japan’s sovereign credit rating, which was cut by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings since the start of 2011. Japan has the world’s largest public debt, at more than 200 percent of GDP, a legacy of stagnant growth since deflation took hold in the 1990s.

Policy Inertia

“This recent episode of deadlock between the political parties underscores the persistent policy inertia that has made it difficult for the Diet to forge and implement” measures to rein in Japan’s borrowing, Moody’s analysts David Erickson and Thomas Byrne in Singapore wrote in a note yesterday. Without resolute leadership following elections, “Japan risks a market demand for a risk premium on Japanese government bonds, making deficit financing and debt refinancing very costly,” they said.

For now, yields on Japanese government bonds show little sign of strain. The benchmark 10-year note yielded 0.775 percent as of 1:33 p.m. in Tokyo, down from about 1 percent at the start of the year.

The government may delay transfers of revenue to local authorities in municipalities and prefectures that are due early this month, and temporarily cut spending on travel and the upkeep of buildings, Finance Ministry documents showed last week.

Finance Minister Jun Azumi said Aug. 31 that he’s willing to beg to get the legislation passed by the end of the Diet’s current session on Sept. 8, and that the risk of running out of money is “not a fiction.”

“A delay in the passage of the bill will make it difficult for the government to compile an extra budget to boost growth,” said Akihiko Inoue, chief strategist at Mizuho Investors Securities Co. in Tokyo. “Exports and production have weakened on the slowdown in global demand, posing a risk of a faltering recovery.”

To contact the reporters on this story: Andy Sharp in Tokyo at; Keiko Ujikane in Tokyo at; Toru Fujioka in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at

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