January 21, 2011
Japan lifts economic view but risks for growth remain
Japan’s trade minister warns on rapid yen rise
TOKYO, Japan upgraded its view of the economy for the first time in seven months on Friday, citing “some movements towards a pick-up” but warned that the risk of slowing growth still loomed large.
“Although the economy appears to be pausing, some movement towards a pick-up can be seen” the Cabinet Office said in its January report, upgrading its view of industrial production, which rose for the first time in six months in November.
“However, the economy remains in a difficult situation,” it added, citing a stagnant employment picture and warning that Japan’s economy “could be depressed by a possible slowdown in overseas economies”.
Unemployment in November was at 5.1 percent, unchanged from the previous month.
The subtle upgrade from the previous month, when the government only said the economy’s expansion seemed to be “pausing recently”, came as China’s growth and healthier signs of a US recovery helped slow a decline in Japanese exports.
China, a key export market for Japan, on Thursday said its economy grew by a higher-than-expected 9.8 percent in the October-December quarter.
A Cabinet Office official said that China’s purchasing subsidies for electronic appliances and automobiles had helped to support production in Japan, but warned of a possible correction when those subsidies end.
“Exports are decreasing modestly, and industrial production shows signs that it has begun to stop decreasing,” the report said.
The government also raised its view of prices, saying corporate goods prices are “mildly increasing”. Even though consumer prices continue to fall, their rate of decline is “moderating,” it said.
Improving corporate profits and a better business investment climate were also cited as positive signs for the Japanese economy.
However, the government also warned of ongoing difficulties, noting the country’s deflation, “high” jobless rate and the risk of “a possible deterioration of the employment situation”.
Japan’s centre-left government in December approved a record 1.1-trillion-dollar budget for the next fiscal year that aims to boost the flagging economy.
Analysts have warned of a likely contraction in the fourth quarter in the absence of one-off factors such as green car subsidies that helped push growth higher in the July-September period.
Measure
Meanwhile, Japan’s new trade and industry minister Banri Kaieda said Friday the government must take “every possible measure” to prevent the yen rising too rapidly, according to the Wall Street Journal.
Kaieda outlined to the US daily steps the government could take to correct excessive yen strength, including intervention in the market and monetary easing.
Japan stepped into the markets for the first time in six years in September, dumping the yen and boosting the dollar in order to safeguard its export sector.
“The yen’s rapid rises, in particular, are very undesirable” as Japan’s small- and medium-sized companies lack the resilience to withstand yen strength, Kaieda said.
“We must use every possible step to correct rapid rises in the yen,” he said. “There are a number of things we can do, including monetary easing and monetary policy. Not just intervention.”
Kan’s centre-left government has repeatedly warned it is ready to intervene again to stem the currency’s rise.
Kaieda was appointed the nation’s trade minister late last week as part of Prime Minister Naoto Kan’s Cabinet reshuffle, after serving a short stint as minister for economy and fiscal policy.
A strong yen not only makes Japan’s growth-driving exports more expensive but erodes companies’ overseas profits when repatriated, with many companies considering sending more production overseas as a result.
The Japanese government said Friday its budget shortfall could reach 280 billion dollars by March 2021, as politicians push for tax hikes and other reforms to help plug the finance hole.
The “primary balance deficit” — a measure of reliance on borrowed money to fund spending — is set to hit 23.2 trillion yen ($280 billion) in the 2020 fiscal year, up 1.5 trillion yen from an earlier estimate in June.
The data is a blow to Prime Minister Naoto Kan’s target of achieving a surplus by then, and will fuel calls for revenues to be boosted by tripling or even quadrupling the five-percent consumption tax.
Finance Minister Yoshihiko Noda said the government will keep to its surplus goal, saying at a press conference that the target is Japan’s “promise to the international community”.
Japan’s public debt is the industrialised world’s biggest at twice the size of the $5 trillion economy, with the welfare costs and revenue shortfall associated with a rapidly greying population adding further pressure.
Fiscal policy minister Kaoru Yosano, a vocal supporter of a consumption tax hike, this week warned that investor confidence in Japan would be lost without reform. However he admitted that reaching a broad consensus will be difficult.
“Among all the work of politicians, perhaps the most difficult one is to form a national consensus about tax, especially about raising burdens,” the 72-year-old told reporters on Friday.
“People may open their hearts to increased burdens only when they become convinced that the tax they pay will eventually return to them,” he said.
The figures also illustrate the political tightrope walked by policymakers trying to reconcile Japan’s dire fiscal situation with the potential negative impact of tax hikes on fragile economic growth.
Opposition
In another development, Japan’s main opposition party will have a hard time agreeing to bills needed to fund the budget for the fiscal year from April unless Prime Minister Naoto Kan’s ruling party abandons costly campaign pledges, its leader said on Friday.
Sadakazu Tanigaki, leader of the Liberal Democratic Party (LDP), also said Kan’s party needed to compile a plan on social security reform that specifies the extent and timing of a sales tax hike before it can join multiparty talks sought by Kan.
Kan faces tough battles in a session of parliament starting next week to debate the 2011/12 budget as opposition parties, emboldened by the government’s lacklustre support ratings, threaten to use their majority in the upper house to block bills.
Kan’s ruling Democratic Party of Japan can enact the 92.4 trillion yen ($1 trillion) budget because it has a majority in the powerful lower house, but the opposition-controlled upper house can block laws needed to carry out the spending.
Tanigaki told Reuters in an interview that it would be hard for the LDP to agree to pass legislation for tax reform and a bill to raise debt for spending.
“The lax campaign manifesto needs to be put behind to prepare the budget for next fiscal year,” he said.
“The manifesto is a failure. (The ruling party) has failed in its plans for a big government with smaller funds.”
The DPJ ousted the long-ruling LDP in 2009 with promises to put more money in the hands of consumers and cut wasteful spending, but has since struggled to come up with the finances to fund pledged policies such as allowances for families with children.
The head of the second-biggest opposition party, New Komeito, said the party would not rule out cooperating with the government on specific proposals but had no plan for now for a future coalition with the DPJ, signalling cumbersome policymaking at best.
Tanigaki reiterated the LDP’s push for Kan to call an early election, although many analysts say a poll is unlikely for now, given that the DPJ would almost certainly lose seats.
The opposition has also raised the bar for Kan to tackle welfare reforms including debate on the politically sensitive sales tax, which at 5 percent is one of the lowest among major economies.
Kan has staked his political career on restoring faith in the social security system and raising the sales tax to finance caring for the rapidly ageing population but his party is also divided on how to proceed with reform.
The LDP is in favour of raising the sales tax but Tanigaki said the government and the DPJ must first present a clear plan as a sign of commitment before his party can take part in the multiparty talks proposed by Kan.
“There needs to be trust, or otherwise there will be doubts they will back off again and then there will be no talks,” Tanigaki said.
Kan floated the idea of raising the sales tax when he took office last June, but toned down his comments after the DPJ lost an upper house election the following month.
“It’s absurd for them to spend money on populist policies and then call on us to figure out how to deal with the consequences.”
While Kan’s appointment of fiscal hawk Kaoru Yosano as economics minister last week was perceived as a signal of Kan’s resolve to rein in public debt twice the size of the $5 trillion economy, Tanigaki was unimpressed.
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