Tokyo: Japan’s government agreed on a $81 billion stimulus package on Tuesday, aimed at preventing the economy from tipping back into recession as deflation persists and a strong yen threatens exports.
Economists said the ¥7.2 trillion plan, equal to about 1.5% of gross domestic product, would not provide a significant lift to an economy dependent on overseas demand for machinery, electronics and cars.
While several other economies are already debating phasing out economic stimulus deployed to fight the financial crisis, Japan continues to struggle amid chronically weak consumer demand and falling prices.
The budget underscores the balancing act faced by prime minister Yukio Hatoyama and his Democratic Party. The Democrats are keen to avoid a recession ahead of an upper-house election next year but are also under pressure to make good on their pledge of fiscal discipline as the country’s public debt nears 200% of GDP, by far the worst among G7 nations.
“This may help the economy somewhat,” said Yasunari Ueno, chief market economist at Mizuho Securities. “But it doesn’t even begin to address the more fundamental issues facing Japan, such as weaknesses in the global economy and deflation.”
Japan pulled out of recession in April-June thanks to a recovery in exports but figures due on Wednesday are expected to show third-quarter growth was much slower than an initial estimate.
Growth is seen slowing further in the first half of next year as the effect of nearly ¥27 trillion stimulus agreed by the previous Liberal Democratic Party government, wears off.
The new package, earmarked for low-interest mortgages for new home buyers, incentives for users of “green” technologies and extended subsidies for energy-efficient cars and household appliances, aims to encourage reluctant Japanese consumers to spend more.
Analysts, however, were sceptical about the plan’s impact and while most expect Japan to avoid a double-dip recession, those who predict another slump were not swayed by the latest spending plan.
“This stimulus will have a limited impact on the economy. I don’t think we need a major change in our forecast,” said Hideki Matsumura, a senior economist at Japan Research Institute, who expects a contraction in both the first and second quarter.
“I would be surprised if the contribution to growth exceeded 0.5 percentage point,” said Simon Wong, regional economist at Standard Chartered in Hong Kong.
Tax hole, supply worries
Financial markets showed a muted reaction to the package that will be mostly funded with contingency funds and money redirected from what the Democrats described as wasteful spending in an earlier plan drawn up by the LDP.
The Democrats have pledged to fund their policies without any extra borrowing, but finance minister Hirohisa Fujii said the new package will require issuing more than ¥100 billion in new bonds.
While that would add only marginally to overall debt supply, Fujii also said an expected shortfall in tax revenues of more than ¥9 trillion would drive this fiscal year’s new debt supply to around ¥53 trillion, up 20% from the initial estimate.
Five-year credit default swaps on Japan’s sovereign debt were quoted at 60/67 basis points on Tuesday, down from just above 70 basis points a week ago, a trader at a Japanese securities house said.
That is much lower than a record high of 130 bps set last February at the tail end of the global financial crisis when political uncertainty and worries about Japan’s fiscal position drove up the cost of insurance against Japan defaulting on its debt.
That means concern over debt supply will keep investors on edge. Japan’s five- to 20-year yield curve hit its steepest level in seven years on Tuesday with long bonds taking a hit from a poor 30-year auction.
“The biggest focus now is whether the government will be able to keep bond issuance below ¥50 trillion next fiscal year and whether it will be able to map out growth strategies,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management.
The government has pledged to cap next fiscal year’s new bond supply at ¥44 trillion, but on Tuesday Hatoyama signalled he would have some wiggle room, when compiling the next budget.
“It’s not good if we stick too much to the ¥44 trillion goal and it hurts people’s livelihoods. But I would like to keep it as our objective,” he told a news conference.
The work on the package, originally due to be completed on Friday, got delayed when the ruling party was forced to add ¥100 billion in spending to appease a small coalition partner, led by outspoken banking minister Shizuka Kamei. The Democrats need their junior partners’ support to enact legislation smoothly.
Analysts said Hatoyama, whose popularity ratings have been eroded by doubts about his leadership ability, had survived the spat with minimal damage, making only a small concession to coalition partner.
“I understand that Mr. Kamei is saying this is a three-party coalition, but this is the Hatoyama government,” National Strategy Minister Naoto Kan told reporters.