EU woes press Japan to address own problems

by Shinya Ajima

Kyodo

You can better yourself by observing others, as a Japanese saying goes, and this may well describe how Prime Minister Yoshihiko Noda was feeling when he hurried home after attending only half of the two-day summit of the Group of 20 major economies in Mexico.

Even as he joined the call for Europe to do everything necessary to contain its deepening sovereign debt and banking crisis, Noda told his G-20 colleagues that Tokyo continues its own battle to restore Japan’s fiscal health, the worst among major developed countries — even worse than some troubled eurozone members.

His short stay in Los Cabos reflected the stark reality facing Noda and his government in the domestic political arena, where he is making a final push to increase the consumption tax despite criticism even from within his own party.

The Lower House is expected to vote on legislation as early as Thursday after Noda won approval for the bills last week from major opposition parties.

But now the focus is shifting to how many lawmakers from his Democratic Party of Japan will withhold support. If the voting divides the party, it could force Noda to dissolve the Lower House for a general election.

Japan is “making full efforts to implement the social security and tax reforms” that would include doubling the sales tax to 10 percent in stages by 2015, Noda told the G-20 summit, according to the government. The country’s social security costs are increasingly weighing on the state budget as the population ages.

Japanese officials said balancing fiscal austerity and stimulus remains a crucial issue for the G-20 countries.

“Various countries expressed their intention to pursue fiscal restoration and economic growth at the same time, even as we have faced challenges,” Finance Minister Jun Azumi, who accompanied Noda to Los Cabos, told reporters.

Like it had at earlier G-20 meetings, Japan last year pledged to hike taxes when Noda attended the G-20 summit in France, a step widely seen as necessary to achieve its budget deficit reduction goals.

Tokyo aims to achieve a primary balance surplus in fiscal 2020, which ends in March 2021, after halving the deficit in fiscal 2015 from levels five years earlier. Any primary surplus means the country can finance government spending except for interest payments on existing debt without issuing new bonds.

But a government estimate showed in January that Japan could miss the goals, even if it raises the consumption tax as scheduled, adding to expectations that the government will have to sanction additional tax hikes.

“Japan’s fiscal problems are deep-rooted,” the International Monetary Fund said in a statement released last week. Reducing the country’s public debt levels would require additional measures that could involve “increasing the consumption tax to . . . at least 15 percent, as it is a stable source of revenue in an aging society,” the IMF said.

As the government has been forced to spend on reconstruction following the March 2011 earthquake and tsunami — some ¥19 trillion over five years, or 3.5 percent of gross domestic product — Japan’s fiscal woes will accelerate, with the gross public debt likely to reach more than 220 percent of GDP during this year or next year.

Credit rating agencies, including Standard & Poor’s and Moody’s Investors Service, have said they are monitoring the Japanese government’s efforts to improve its public finances, indicating they would downgrade the ratings on the government bonds if the tax hike bill fails to clear the Diet.

The country’s growth will likely be supported in 2012 with robust domestic demand spurred by the fiscal spending on reconstruction, while the government’s stimulus measures helped sales growth among carmakers, a key industry for the economy, which is suffering from the recent sharp rise of the yen and consequent slowdown in exports.

The economy grew an annualized real 4.7 percent in the first quarter of the year from the previous three months, while the government is expected to set the goal soon of achieving an average nominal 3 percent and real 2 percent growth between fiscal 2011 and 2020.

However, many economists have forecast a slowdown in the growth rate from 2013 as demand linked to reconstruction dwindles and from the negative impact of the consumption tax hike, which would start in 2014. That hike is expected to weigh on retail sales and housing investment following a brief surge of last-minute buying.

“We advise caution on the fiscal policy front . . . (and) expect increased reliance on further monetary easing as leeway for fiscal expansion retreats,” Tetsufumi Yamakawa, cohead of Japan research at Barclays Capital Japan Ltd., said in a report.

The focus is shifting to whether the Bank of Japan will further loosen its monetary policy to boost growth, possibly under pressure from politicians.

A widespread view within markets is that the effects of the central bank’s surprise decision in February to introduce an inflation goal, which suggested a prolonged period of accommodative policy, have almost died down amid resurging tensions over Europe that have led the yen to resume its appreciation and Tokyo stocks to lose ground.

But Hiromichi Shirakawa, chief economist at Credit Suisse in Japan, said this is also due to the BOJ failing to assure market participants that it would continue to pursue what the central bank calls “powerful monetary easing.”

Under the current terms of its asset purchase program, the BOJ is set to slow the pace of purchasing long-term government bonds, or funding state finances, in the latter half of next year, Shirakawa said.

“To increase the effectiveness of monetary easing, (the BOJ) must make clear its commitment to the program even in the second half of 2013 and after,” he said.