Tokyo goes for the ‘biggest bang from its yen’

Posted by Gwen Robinson on Dec 09 08:50.

More action in Japan — this time with a mega Y7,200bn ($81bn) stimulus package which seems to have flummoxed more than a few economists.
In fact, after the spending plan was unveiled by the Hatoyama government on Tuesday, there was a roaring (or was that a “stunned”?) silence from usually vocal pundits.
As one economist said: “I’m really not sure what to make of it all”. Gazing forlornly at the single page of scant data that the government issued with its initial announcement of the package, various analysts, reporters and commentators could only concur.
After much political wrangling, the package — to be implemented in the first quarter of 2010 — focused broadly on spending promises made by the DPJ leading up to its landslide victory in the August elections, and a bit more.
Amid growing concerns about the state of Japan’s public finances, it also attempted a delicate balancing act between dealing with the huge public debt burden and worries about sustaining Japan’s recovery from its sharpest post-war recession.
Whether it has struck the right balance or not is hard to tell given that the initial announcement was extremely vague, with relatively few figures or details. A government statement gave some big-picture figures, saying the package included Y3,500bn in new spending to be directed at “supporting the regions”, Y800bn for environment-related policies, and Y600bn for promoting employment.
Around Y2,700bn in funding for the new package is expected to come from spending trimmed from a previous stimulus budget announced by the former ruling LDP before its defeat in August’s election. As the FT noted, DPJ leaders had denounced the LDP package as ill-considered and wasteful, and had suggested they would use the savings to help finance election pledges such as child allowances and reduced highway tolls next year.
But fresh worries about a potential “double dip” in the economy — and fears the new government might be blamed if the recovery falters — prompted the decision to spend the savings this fiscal year instead.
But that is not nearly enough for the mega-stimulus plans. Oh no. Adds the FT:While the government also hopes to tap contingency funds it gave few details of funding for the package beyond saying it would “do its utmost” to avoid new bond issuance. Hirohisa Fujii, finance minister, said the extra Y100bn added to the package since Friday would be financed through the issue of special construction bonds.
Err, no details yet about these “special construction bonds” — a proposed scheme that has left critics wondering after the sometimes mercurial finance minister, Fujii, acknowledged the already vast amounts of Japanese government bond issuance in the pipeline as a concern.
JGB sales for the current fiscal year are now expected to total over Y53,000bn, far exceeding tax revenues of around Y37,000bn, Fujii said on Tuesday. And while he repeated earlier statements about limiting new bond issuance in the year from April 2010 to under Y44,000bn, he also said: “Japan’s fiscal situation is very serious”.
As Lex neatly sums up on Wednesday:
Japan’s economy is on a war footing. For the first time since the end of the second world war, the government is issuing more new debt than it is taking in via tax revenues. That is only partly thanks to Tokyo’s latest stimulus programme, worth Y7,200bn ($81bn) or 1.5 per cent of gross domestic product. While this is designed to prevent a double-dip recession, even the government seems unclear where the extra money will come from.
Worries about the economy were, indeed, highlighted on Wednesday, with heavy downward revisions of estimated Q3 GDP growth further fuelling fears of the “double-dip” recession scenario.
As the FT reported, Q3 growth estimates on the previous quarter were slashed from 1.2 per cent to just 0.3 per cent. At an annualised rate, the revision was from 4.8 per cent to 1.3 per cent. Economists expect the latest estimate to be way below the robust 1.2 per cent quarterly expansion reported last month.
Adds the FT:
A recovery in business investment reported in the first release turned out to be an illusion. The figure was revised down from a 1.6 per cent rise on the previous quarter to a 2.8 per cent fall, accounting for two-thirds of the total revision. The second biggest revision was to private sector inventories, now judged to have contributed 0.1 per cent to quarter-on-quarter growth, rather than 0.4 per cent.
However, the overall message from this week’s figures — that the economy is even more reliant on stimulus-driven growth in consumption than previously thought — supports the government’s move to launch the new fiscal package. Afterall, said Capital Economics, while the stimulus “will not transform the prospects for the economy”, the measures “appear to be well-aimed to get the biggest bang for the yen”.