Aso Says Japan in Recession, May Need to Delay Balancing Budget

By Keiichi Yamamura and Toru Fujioka

Aug. 5 (Bloomberg) -- Japan's longest postwar expansion may be over so the government should consider postponing its goal of balancing the budget by 2011, according to Taro Aso, the ruling Liberal Democratic Party's No. 2 official.

``Japan has probably entered a recession,'' Aso, who was appointed secretary-general of the LDP last week, told reporters in Tokyo today. ``We shouldn't try to balance the budget at the expense of the economy'' and the goal can be put off, he said.

Aso differs from Prime Minister Yasuo Fukuda, his political rival, who said today he'll use ``every means necessary'' to balance the books, leaving open the option of raising the sales tax from 5 percent. New Economy Minister Kaoru Yosano and Finance Minister Bunmei Ibuki said eliminating the deficit will be difficult, though the government will stick to the goal.

``Aso doesn't want voters to think the sales tax might be increased anytime soon,'' said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo. ``It's just an election strategy and they shouldn't give up the goal so soon.''

Fukuda reshuffled his Cabinet last week to shore up his popularity, which has slumped as rising food and fuel prices sap household income. His LDP-led coalition must defend its two- thirds majority in lower house elections due by September 2009.

Aso is the best choice for prime minister, according to a survey by the Sankei newspaper published yesterday. Fukuda beat Aso in a contest for the party's leadership after Shinzo Abe resigned last September.

Approval Rating

The Cabinet's approval rating rose 12 percentage points to 38 percent after the Aug. 1 reshuffle, a survey conducted by the Nikkei newspaper and TV Tokyo Corp. showed yesterday.

Ibuki and Yosano said Aug. 2 that the government can't rely on faster growth to balance the budget, a goal set in 2006 to reduce the world's largest public debt. Japan will have a 3.9 trillion yen ($37 billion) shortfall in the year starting April 2011, the Cabinet Office said last month.

``It'll be very tough,'' Ibuki said today. ``But the Ministry of Finance has a duty to make an effort.''

Japan may downgrade its economic assessment this week, saying the world's second-largest economy is ``weakening'' for the first time since May 2001, when the nation was in a recession, the Nikkei newspaper reported today.

The economy has yet to contract for two consecutive quarters, one definition of a recession. Still, soaring costs and weakening demand have eroded profits, prompting companies to pare output, investment and hiring. Production, household spending and exports declined in June, and the unemployment rate climbed to the highest in almost two years.

The government needs to propose its tax-reform plans within the next two to three years, Ibuki said on Aug. 2.

``Given the economic situation at present, it will be essentially impossible for the new Cabinet to raise taxes,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Keiichi Yamamura in Tokyo at kyamamura@bloomberg.net.