Election may curtail stimulus even as recession looms

by Mayumi Otsuma and Kyoko Shimodoi

Bloomberg

Prime Minister Yoshihiko Noda’s decision to call an election in December may inhibit the government’s ability to stimulate the economy even as it slides toward its third recession in four years.

Compiling an extra budget soon will be “difficult” as lawmakers can’t debate spending with the Diet dissolved, economy and fiscal policy minister Seiji Maehara said this week.

Stimulus using reserve funds won’t be enough to support the economy, he said Friday.

Constraints on government action add extra pressure for loosening by the Bank of Japan to spur growth, counter deflation and weaken the yen. Opposition leader Shinzo Abe’s call for unlimited easing had a bigger effect on the currency than the BOJ’s most recent monetary loosening on Oct. 30, sending the yen to a six-month low against the dollar Thursday.

“If the budget is delayed, or if the supplementary budget is undecided, there is a risk that the recession, which should be for two quarters, could last for three or even four quarters,” said Junichi Makino, chief economist at SMBC Nikko Securities Inc.

Finance Minister Koriki Jojima pledged Friday another round of stimulus using reserve funds after announcing ¥400 billion in measures last month.

The government Friday downgraded its view of the economy for a fourth month, the longest streak since the global financial crisis. Panasonic Corp. this week said it plans to cut 8,000 jobs in the second half of this fiscal year as it restructures amid falling demand and the rising yen.

According to the median of 24 estimates in a Bloomberg survey, the economy shrank an annualized 3.5 percent last quarter and will contract 0.4 percent in this three-month period, the third technical recession since 2008. Japanese recessions are officially defined by a government-charged panel that considers data beyond GDP figures.

Abe, head of the Liberal Democratic Party, called Thursday for unlimited easing until deflation is ended, and for an inflation target of 2 to 3 percent and immediate, bold policy, saying “there is no time to wait for the BOJ governor to change next year, so I want to act now and do what I can.”

Abe’s demand is “very radical in the sense that it completely ignores the notion that a central bank should work independent from the government,” Masamichi Adachi, a senior economist at JPMorgan Securities Japan Co. and a former BOJ official, said in an emailed research note.

Abe also said an LDP government would increase public investment. A party policy proposal from June called for spending an extra ¥15 trillion over three years.

“What’s influential to the economy is whether a postelection government will choose an aggressive fiscal spending policy,” said Noriatsu Tanji, a fixed-income strategist at Barclays PLC in Tokyo. “If a new government opts for an aggressive fiscal stance, then it will be a factor to increase bond issuance and may raise bond yields.”

Elsewhere in Asia, Hong Kong’s economic growth probably accelerated last quarter, while Malaysia’s slowed, economists forecast before government reports due Friday. Singapore’s gross domestic product fell 5.9 percent in the three months through September from the prior quarter, a final reading showed Friday.

Industrial output growth in the U.S. probably slowed to 0.2 percent in October from 0.4 percent in September, economists predicted before a report was due out in Washington.

In Japan, it would be the first time since 1993 that the Finance Ministry has delayed budget compilation into the new year. The process is usually completed by late December to allow enough time for the Diet to vote on the bills before the fiscal year begins in April. If passage of the bills is delayed past April, the government would need to compile a stop-gap budget that would only allow minimum mandatory spending to cover the gap.

“The delay in drafting next year’s budget will likely have a negative impact on the economy in the spring,” said Kiichi Murashima, chief economist at Citigroup Inc. “The government may try to submit a large-scale extra budget” of at least ¥3 trillion early next year to make up for the delay, he said.