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Stimulus called costly, short-term fix

Aso's plan may saddle economy with huge debt burden and smother future growth

by Keiko Ujikane and Toru Fujioka

Bloomberg

The record ¥15.4 trillion stimulus package may give the economy a short-term boost, but leave it saddled with a debt burden that will smother future growth, economists have said.

The plan unveiled Friday by Prime Minister Taro Aso, who faces a general election this year, is aimed at creating jobs in an economy heading for the worst postwar recession. Equal to 3 percent of gross domestic product, the measures will add to debt that the Organization for Economic Cooperation and Development already forecasts will rise to 197 percent of GDP next year.

“The stimulus will probably prevent Japan from falling apart in the short term, but it will leave a massive bill for the future,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “The package doesn’t do anything to promote a sustainable economic recovery.”

The plan does little to address the nation’s liabilities, give its aging citizens confidence in their pension system, or encourage them to spend some of their ¥1.400 quadrillion in financial assets, said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

“The fiscal situation of the government is deteriorating faster than anyone imagined,” Daley said. The government needs to address its debt “so the Japanese consumer feels comfortable that their pension system is viable. They will then start to unlock those savings,” he said.

Finance Minister Kaoru Yosano said the government will sell more than ¥10 trillion in debt to fund the spending on top of ¥33.3 trillion of bonds to be issued this fiscal year. That would take total liabilities to more than ¥800 trillion by next March, excluding short-term debt that the OECD uses to calculate its ratio.

The debt burden will be borne by a shrinking population that will be hard-pressed to keep the economy growing fast enough in years to come, said John Richards, head debt-market strategist for the Asia-Pacific region at Royal Bank of Scotland PLC in Tokyo.

“The burden of this debt is going to be felt and it’s going to be much worse than people thought,” Richards said. “It’s going to result in higher interest rates and slower growth than Japan can otherwise achieve.”

Aso, 68, said the government will consider raising the consumption tax from the current 5 percent once the economy recovers “in order to not leave a huge debt for our children.”

Bond yields have climbed to the highest in almost five months after the government’s announcement.

“Yields may rise as the government fails to give confidence that the stimulus package will improve jobs and consumption and boost tax revenue,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “Higher government bond yields may lead to higher borrowing costs for companies,” stunting investment and economic growth, he added.

Aso pledged to create up to 2 million jobs in the next three years and boost demand by between ¥40 trillion and ¥60 trillion by focusing on industries such as solar power, electric cars and energy-saving consumer electronics.

That compares with the 3.5 million jobs U.S. President Barack Obama pledged to save or create with his $787 billion stimulus package. The ¥25 trillion in total spending announced by Aso since he became prime minister in September is about 5 percent of GDP, a ratio comparable with the U.S. stimulus.

“Aso is very optimistic” on that jobs creation number when you compare it with Obama’s plan, Daley said. “When you throw $150 billion at an economy in one year, you will see an effect. It will not be long term, nor sustainable.”

Analysts said fixing Japan’s long-term fiscal mess is the key to stimulating domestic consumption and weaning the nation off its export dependence.

The older generation is reluctant to spend after the government revealed two years ago that it had lost pension records for 50 million people, or more than a third of the entire population. Younger people are growing concerned that the system will have run out of money by the time they retire.

A record 84 percent of Japanese are worried about retiring because they say they lack savings, an annual Bank of Japan survey showed in October.

“What households and the elderly need to see in order for them to start spending money is evidence that they don’t have to worry about retirement,” said Shirakawa at Credit Suisse. “The government isn’t providing any relief or convincing plans for the future. It’s all cheap talk by politicians.”