Japan Election May Curtail Stimulus as Recession Looms: Economy
Prime Minister Yoshihiko Noda’s decision to call an election in December may inhibit the government’s ability to stimulate an economy that’s sliding toward its third recession in four years.
Compiling an extra budget soon will be “difficult” as lawmakers cannot debate spending with the Diet dissolved, Economy Minister Seiji Maehara said this week. Stimulus using reserve funds won’t be enough to support the economy, he said in Tokyo today. Drafting of next fiscal year’s main budget may be delayed, Finance Minister Koriki Jojima said this week.
Constraints on government action add extra pressure for loosening by the Bank of Japan to spur growth, counter deflation and weaken the yen. Opposition leader Shinzo Abe’s call yesterday for unlimited easing had a bigger effect on the currency than the central bank’s most recent easing on Oct. 30, sending the yen to a six-month low against the dollar.
“There’s a risk that the recession which should be for two quarters could last for three or even four,” said Junichi Makino, chief economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest bank by market value, citing the risk of budget delays.
Noda will dissolve the lower house of parliament today after the upper house passed a bill to issue bonds to finance spending for the rest of this fiscal year, following a months-long impasse that left the government weeks away from running out of money. The election will be held on Dec. 16.
Jojima today pledged another round of stimulus using reserve funds from this year’s budget after announcing 400 billion yen ($4.9 billion) of measures last month.
The government today downgraded its view of the economy for a fourth month, the longest streak since the global financial crisis as exports fall and demand weakens. Panasonic Corp. (6752) this week said it plans to cut 8,000 jobs.
Japan’s economy shrank an annualized 3.5 percent last quarter and will contract 0.4 percent in this three-month period, according to the median of 24 estimates in a Bloomberg survey, the third technical recession since 2008. Japanese recessions are officially defined by a government-charged panel that considers data beyond GDP figures.
Japan’s Topix Index is headed for the biggest two-day gain in more than a year on speculation that the election will be followed by more aggressive monetary action.
The Topix was 1.9 percent higher at 2:18 p.m.in Tokyo, with more than two shares advancing for each that fell. The gauge has gained more than 3.7 percent in the two days since elections were called. The Nikkei 225 Stock Average climbed 2.1 percent, with volume more than 60 percent above the 30-day average.
Abe, the leader of the Liberal Democratic Party, yesterday called for unlimited easing until deflation is ended, an inflation target of 2-3 percent, and immediate, bold policy, saying “there is no time to wait for the BOJ governor to change next year, so I want to act now and do what I can.”
An LDP panel today released a statement proposing the establishment of a joint private-public fund to buy foreign bonds in a bid to defeat deflation and weaken the yen, without giving further details.
Abe’s demands are “very radical in the sense that it completely ignores the notion that a central bank should work independent from the government,” Masamichi Adachi, a senior economist at JPMorgan Securities Japan Co. in Tokyo and a former central bank official said in an e-mailed research note.
The yen gained 0.2 percent against the dollar on Oct. 30, when the central bank expanded its asset-purchase fund, compared with the currency’s 1.1 percent decline yesterday. The yen was at 81.04 per dollar at 2.13 p.m. in Tokyo.
Abe also yesterday said that an LDP government would increase public investment. A party policy proposal from June called for spending an extra 15 trillion yen over three years.
“What’s influential to the economy is whether a post-election government will choose an aggressive fiscal spending policy,” said Noriatsu Tanji, a fixed-income strategist at Barclays Plc in Tokyo. “If a new government opts for an aggressive fiscal stance, then it will be a factor to increase bond issuance and may raise bond yields.”
Elsewhere in Asia, Hong Kong’s economic growth probably accelerated last quarter, while Malaysia’s slowed, economists forecast before government reports due today. Singapore’s gross domestic product fell 5.9 percent in the three months through September from the prior quarter, a final reading showed today.
Industrial output growth in the U.S. probably slowed to 0.2 percent in October from 0.4 percent in September, economists predicted before a report in Washington.
In Japan, a delay in the compilation of the 2013 budget into the new year would be the first since 1993. The process is usually completed by late December to allow enough time for parliament to vote on the bills before the fiscal year begins in April. If passage of the bills are delayed past April the government would need to compile a stop-gap budget which would only allow minimum mandatory spending to cover the gap.
“The delay in drafting next year’s budget will likely have a negative impact on the economy in spring,” said Kiichi Murashima, chief economist at Citigroup Inc. “The government may try to submit a large-scale extra budget” of at least 3 trillion yen in the new year to make up for the delay, he said.
Maehara told reporters today that the government can tap about 940 billion yen in reserve funds for a second round of stimulus this month. The package may include steps which won’t require funding such as deregulation, Jojima said. The government will also consider a third round of measures, which will be based on the compilation of an extra budget, Jojima said.
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