Japanese stimulus – a likely dud
Japan's possible bid to embark on a fiscal stimulus, amid darkening economic data, will prove too little, too late, reckon analysts. The stakes are high.
On Monday, export-reliant Japan announced a 558.6 billion yen ($7.04 billion) trade gap in September, its third straight monthly deficit, underscoring the lack of global demand and the country’s chronic lack of sources for growth.
|Japan's prime minister Yoshihiko
Noda at the annual meetings of the
IMF and the World Bank in Tokyo
Japan – weighed down by its 235% of GDP gross debt burden – has sported, since the 1990s, the weakest economic growth rate among the G7. And sustainable sources of growth seem few and far between. Prospects for greater intra-Asian trade and financial integration – from a low base – have dimmed in the near-term thanks to conflict with China, reform inertia in Asia more generally, and the challenge of liberalizing markets at a time of growing unemployment and market uncertainty.
What’s more, political challenges have impeded Japan’s reform drive, notwithstanding the recent and historic introduction of a consumption tax. In any case, the latter reform underscores the all-too familiar challenge of attempting to cut debt without jeopardizing already-weak growth.
While Monday’s trade gap increases the chance the Bank of Japan will embark on yet another round of monetary easing amid a liquidity trap, the government has recently signalled its intention to launch a new stimulus. However, don’t bet on a pro-growth fiscal game-changer, reckon analysts.
Capital Economics’ analysts sum up market pessimism, amid suggestions prime minister Yoshihiko Noda is wielding the prospect of a looser fiscal policy as a smokescreen for his election strategy:
|“But the timing of the announcement has drawn criticism that Noda is trying to boost the DPJ party’s popularity ahead of a general election, which is due by next summer but could be held much sooner. The government has been frustrated by the opposition-controlled upper house of parliament, which has prevented the passage of deficit financing bills, which are necessary to raise new funds for this year’s fiscal expenditure. Additional funds for any stimulus package are likely to meet similar opposition and allow Noda to paint opposition parties as the bad guys standing in the way of efforts to boost the economy.”|
Even though the real internal rate of return for, say, infrastructure projects could be juicy amid a 10-year borrowing cost of 0.8%, the government is unlikely to receive Diet approval for issuing deficit-covering bonds, leaving contingency funds in the 2012 budget as the expected financing avenue. In that case, the stimulus is likely to be too small, say Capital Economics' analysts, at around two trillion yen, just 0.4% of annual GDP, or 2.2% of the government's annual budget expenditure.
Far too little, far too late:
|“We are also sceptical that the timing of any stimulus package will make much difference to Japan’s economy. Noda has instructed his ministers to have a plan by the end of November, which means that any economic boost would probably not materialise until the first quarter of 2013 or later, too late to affect the current slowdown.
"The package may also fail to reignite the election hopes of the DPJ as Noda is being backed into a corner over his legislative plans and his only bargaining chip is the dissolution of the Diet. He may be forced to call an election on the LDP’s timetable, and whilst this may make the opposition parties appear obstructive, the DPJ are likely to appear weak to the electorate.
"Finally, the dissolution of parliament before the end of the year will be an unwelcome distraction as the budget for fiscal 2013 (starting in April) is due to be compiled before the end of December. Politicians appear to be becoming further detached from the concerns of the electorate, with the election looking like a battle over who gets to steer the Titanic after it has hit the iceberg."
In other words, the stimulus might never see the light of day or, if it does, will prove far too small.
In any case, there is surely a danger that markets are under-pricing Japanese macro risk: if the trade deficit presages a deterioration of the current account then capital outflows and yen depreciation could take root – potentially triggering a jump in bond yields (though a weaker yen would presumably boost exports and the deflation battle).
In any case, Japan serves as a poster-child for two camps: fiscal excess for austerity fetishists and, for deficit-doves, the foolhardy contention that exploding debt burdens inevitably trigger high sovereign bond yields.
However, amid this polarized debate, don’t forget the bigger picture: with the UK, eurozone, US and possibly Japan poised to embark on a multi-year fiscal retrenchment, a global demand deficit will continue to blight an economic recovery.