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Japan Stimulus Limited as Diet Standoff Blocks Extra Budget

Japan's Prime Minister Yoshihiko Noda
Japan's Prime Minister Yoshihiko Noda. Photographer: Katsumi Kasahara/Pool via Bloomberg

Japan’s government plans to tap discretionary budget funds to counter an economic slowdown as a legislative stalemate threatens to leave the Noda administration without cash as soon as next month.

Prime Minister Yoshihiko Noda yesterday ordered his Cabinet to draw up economic stimulus measures by November, Chief Cabinet Secretary Osamu Fujimura said. With Finance Minister Koriki Jojima telling reporters that the idea of a supplementary budget would be considered later, the government can use around 1.3 trillion yen ($17 billion) in reserves from this year’s budget.

Noda’s room for fiscal maneuver is limited by the political opposition’s refusal to give the government authority to borrow to pay for this year’s deficit. Politicians instead may focus on applying pressure on the Bank of Japan, and banks including JPMorgan and UBS AG are among those predicting the BOJ will boost asset purchases this month.

“The next economic stimulus should come from the BOJ,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse AG and a former BOJ official. The government “does not want to do a big package because monetary stimulus is in sight.”

Stocks Down

The Nikkei 225 Stock Average was at 8,905.23 at 10:05 a.m. in Tokyo, down around 13 percent from this year’s high in March, as tensions with China add to drags on trade and the economy. Toyota Motor Corp. and Nissan Motor Co. last week reported their biggest drops in China sales since at least 2008.

The government last week downgraded its economic assessment for a third month, the longest streak since the 2009 global recession, as gains in the yen and slowing overseas demand hurt exporters. The yen was at 79.13 per dollar, about 5 percent from the postwar high in October 2011.

The expiry of subsidies for car purchases is sapping domestic demand and the economy remains mired in deflation. The Bank of Japan this month will probably predict it will miss a 1 percent inflation goal in the next two fiscal years, according to people familiar with the matter.

BOJ board members will at month-end release updated economic projections for the 2012 and 2013 fiscal years and the first set of forecasts for the year beginning in April 2014. The figures will probably show consumer prices, excluding fresh food, rising less than 1 percent, the people said on condition of anonymity because the discussions are private.

Defeat Deflation

Failure to achieve the target will increase pressure for more easing. Noda last month pledged to defeat deflation within a year, while Shinzo Abe, the head of the opposition Liberal Democratic Party, said he wants an inflation rate of 3 percent. Consumer prices excluding fresh food fell 0.3 percent in August, matching the steepest decline in 16 months.

Citigroup Inc. and JPMorgan Chase & Co. predict the economy will contract in the third and fourth quarters of this calendar year. The central bank has so far held off from more easing this month after expanding its asset-purchase fund by 10 trillion yen in September. Attention now turns to an Oct. 30 meeting.

Junko Nishioka, RBS Securities Japan Ltd. chief economist and a former central bank official, has said that another 10 trillion yen move is likely.

Tap Reserves

While Fujimura didn’t give details on the size of the planned government stimulus, he said funds would come from reserves and special accounts in the budget for the current fiscal year.

“Around three or four trillion yen would make a difference,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo.

The issuance of deficit-financing bonds is needed to pay for the rest of this year’s budget, with Jojima reiterating yesterday that the government will run out of money by the end of November without passage of a bond issuance bill. He told reporters that “it could be possible” to use reserves to pay for spending.

The ruling Democratic Party of Japan has so far failed to gain support for the legislation from the main opposition LDP, which, together with minor parties, controls the upper house. Any supplementary budget would also require parliamentary approval.

The LDP is pushing Noda to hold an election by the end of the year, after he promised in August to hold the poll “soon.”

“The economy is weakening and in order to tackle downside risks it is a matter of urgency to speed up efforts to escape deflation and re-activate the economy,” the government said in a statement yesterday. The measures would concentrate on three areas: support for green energy, agriculture and biotechnology; deregulation and encouraging private investment; and reconstruction after last year’s disasters, according to the statement.

Economy Minister Seiji Maehara told reporters yesterday that Noda has a “sense of crisis” about economic conditions, and said he asked other ministers to consider policies that would take advantage of the strong yen.

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