Aso takes reins of shrinking economy with fiscal gusto

Ex-leader's top task will be to keep bond market tamed as debt spirals

by Mayumi Otsuma and Kyoko Shimodoi


Taro Aso, son of a cement magnate and a champion of pork-barrel spending when prime minister, is Japan’s sixth finance chief in three years, auguring expanded fiscal stimulus in the world’s third-largest economy.

Aso, 72, will also serve as deputy prime minister and financial services minister in Prime Minister Shinzo Abe’s administration.

The finance minister’s first task will be to deliver on his party’s pledge of a “large-scale” supplementary budget to stimulate the economy, which is forecast to shrink for a third straight quarter. At issue will be averting any selloff in the bond market as the nation grapples with debt that’s in excess of twice the size of gross domestic product and as Aso calls for a new plan to restore fiscal health.

“Aso’s challenge will be to pursue an expansionary fiscal policy without triggering a rise in bond yields,” said Mari Iwashita, Tokyo-based bond strategist at SMBC Nikko Securities Inc. “It seems the LDP isn’t paying much attention to the bond markets. It’s possible that ratings companies may signal a downgrade as a warning.”

The Liberal Democratic Party must establish its own “framework” to curb spending and debt expansion, Aso told reporters early Thursday morning after the Cabinet was sworn in by Emperor Akihito Wednesday evening. Aso said he won’t adhere to limits made by the previous government to cap new bond issuance for the fiscal year ending March 31 to ¥44 trillion.

“We can see that Japan has completely failed to overcome deflation during the past three years,” Aso said. “Our priority is to ensure Japanese people can perceive that the economy is improving.”

Japan’s sovereign bond risk increased in the runup to the assumption of power by the LDP, which won the Dec. 16 Lower House election. The cost to insure the debt from nonpayment for five years rose 14.5 basis points to 86 basis points as of 3:04 p.m. in Tokyo Wednesday, from 71.5 basis points Nov. 13, according to data provider CMA. That’s on course for its highest close since Sept. 26, the data show.

The incoming leadership team has championed both fiscal and monetary stimulus, along with a weaker exchange rate to end Japan’s deflation and restart growth. Shigeru Ishiba, secretary general of the LDP, said last week that a yen of 85 to 90 per dollar was “adequate.”

Abe asked Aso to increase coordination with the Bank of Japan and has called for comprehensive measures to counter the yen’s strength, Aso told reporters Thursday.

Abe, who spoke late Wednesday in a televised press conference, said his government intends to restore “strong” economic growth. Priorities include bold monetary policy and a flexible fiscal policy, he said.

“We will compile a large-scale budget because our government’s mission is to overcome deflation,” Abe said. “Countries that give up on growth have no future.”

The currency Wednesday slid through 85 for the first time since April 2011, adding to losses since Abe in mid-November called for unlimited easing by the BOJ. It was at 85.64 per dollar as of 5:00 p.m. in Tokyo. The Nikkei 225 stock average closed up 1.5 percent, heading for its seventh week of gains. Benchmark 10-year bond yields rose to their highest levels in nearly two months.

Aso is one of nine former Cabinet ministers to return to government after the LDP won the election this month only three years after surrendering a half-century grip on power.

During his 12 months as prime minister through September 2009, the one-time Olympian compiled three extra budgets worth about ¥20 trillion, abandoned a target to balance the budget by March 2012 and distributed a ¥12,000-per-person cash handout.

Among the elements in Aso’s record ¥15.4 trillion stimulus package unveiled in April 2009 was ¥12.4 billion to get rid of fishing gear dumped by foreign boats and ¥400 million for cutting down trees to keep “beasts and birds” out of towns.

A history of verbal gaffes raises the risk of miscues to financial markets as Aso takes the Finance Ministry’s helm. Past blunders include saying that he wanted Japan to be a country where “rich Jews” would want to live, and that mothers need to be disciplined more than their children.

He referred to former British Prime Minister Tony Blair as “Tony Brown” during a speech at the World Economic Forum in Davos, Switzerland, and called for the Emperor to visit Tokyo’s Yasukuni Shrine, considered in the rest of Asia as a symbol of Japan’s military aggression.

His boss, Abe, corrected himself on Dec. 20 after seeming to indicate he had advance knowledge of a BOJ decision.

“Aso has a record for slips of the tongue, and we need to be careful about what he says as finance minister,” said Takahiro Sekido, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. and a former BOJ official. “His remarks may make financial markets volatile, such as by signaling intervention even if there is no plan for such action.”

Fiscal stimulus may help bring an end to the latest recession at the risk of adding to Japan’s borrowing. From 2008 to 2009, covering Aso’s time as prime minister, Japan’s debt rose from around 170 percent of gross domestic product to about 190 percent. At the end of last year it was more than double the size of the economy.

Aso’s use of fiscal stimulus as prime minister was a “bold decision” to mitigate the impact of the global financial crisis, said Richard Koo, chief economist at Nomura Research Institute Ltd. in Tokyo, who has known Aso for more than 10 years and is the author of a book on the nation’s postbubble economy.

“Those who deride him as a big spender forget that he was prime minister when the Lehman shock happened,” he said, referring to the September 2008 demise of Lehman Brothers Holdings Inc. that tipped much of the world into a recession. “Before the crisis, we were working on issues such as accelerated depreciation allowances and generous investment tax credits. Those are the fiscal measures we need right now, not just bridges and roads.”

Aso, a member of Japan’s 1976 Olympic skeet shooting team, was the nation’s leader when the LDP finally lost its grip on power in 2009. He studied at Stanford University and the London School of Economics and was foreign minister during Abe’s first stint as prime minister from 2006 to 2007.

“We must consider what needs to be done to beat this recession and end deflation,” Aso said while campaigning with Abe in Tokyo on Dec. 15. “We need more spending” and monetary easing from the BOJ, he said.

A Catholic, Aso joined the family company Aso Industries in 1966 and rose to become president and CEO of Aso Cement Co. only seven years later before entering politics in 1979, according to his website.

With regard to monetary policy, the LDP and its New Komeito coalition ally Wednesday agreed on a 2 percent target for inflation, signaling increased pressure on the BOJ to expand its asset-purchase fund. Consumer prices excluding fresh food, a benchmark used by the BOJ, haven’t risen as much as 2 percent for any year since 1997, when the sales tax was last raised, under Ryutaro Hashimoto.

Aso will oversee whether the government follows through on a deal with the previous administration to boost the sales tax again. Aso reiterated Thursday that the economy should improve before implementing the two-stage doubling of the levy. The tax is set to increase to 8 percent in April 2014 and 10 percent in October 2015 from the current 5 percent.

The LDP said in its election platform that it would halve the ratio for the fiscal deficit, excluding debt financing costs, relative to GDP by 2015. The ruling party aims to achieve a so-called primary surplus by 2020.

“Abe has said he’s confident that Japan can avoid a jump in bond yields even if inflation starts to surge, as long as the central bank buys lots of debt,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “But we haven’t seen any country that has succeeded in such a challenge.”

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