By Aki Ito and Keiko Ujikane
Dec. 9 (Bloomberg) -- Japanese Prime Minister Yukio Hatoyama’s 7.2 trillion yen ($81 billion) stimulus will help the nation avert another recession next year without overcoming the deflation that threatens the economy’s longer term prospects.
The spending, unveiled ahead of a government report today that showed growth in the third quarter was slower than initially estimated, included employment subsidies, loan guarantees and incentives to buy energy-efficient products.
Hatoyama compiled his first stimulus package since becoming premier in September after the yen surged to a 14-year high against the dollar, threatening the export-led recovery. The plan may keep the economy afloat until the rebound in overseas demand reaches households, according to Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo.
“In the short term, it will help avert a double-dip recession,” Miyazaki said. “This stimulus won’t do enough to fight deflation, and it didn’t include anything to weaken the yen.”
The yen surged to 84.83 on Nov. 27, the highest level since 1995, and has advanced 4 percent against the dollar in the past three months. It traded at 88.56 per dollar at 9:19 a.m. in Tokyo from 88.43 late yesterday.
Slower Growth
The Nikkei 225 Stock Average fell 1.3 percent after the Cabinet Office said the economy expanded at an annual 1.3 percent pace in the three months ended Sept. 30, slower than the 4.8 percent reported in preliminary figures last month. The figure was revised to reflect a Finance Ministry survey that showed companies slashed spending at a record pace in the period.
Economists say Hatoyama’s package will help growth next year. Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo, predicts it will add 0.2 percentage point to gross domestic product, while Yasuo Goto, chief economist at Mitsubishi Research Institute, forecasts it will bolster GDP by 0.5 percentage point. The economy will expand 1.2 percent in 2010, according to the median estimate of 14 economists surveyed by Bloomberg News.
Not everyone says the spending will help the economy. Morgan Stanley Asia Chairman Stephen Roach said Hatoyama needed to be “much more aggressive” with his policies.
Second Lost Decade
“It’s tiny,” Roach said of the stimulus in an interview on Bloomberg Television yesterday. “This is an economy that went into its worst recession, the second lost decade, late last year and is barely coming out. The new government is not off to a good start in formulating policy strategy.”
The stimulus lacked focus on policies that could bolster the nation’s growth prospects in the long term, such as corporate tax reductions and incentives for companies to invest in developing industries, according to Yasukazu Shimizu, a senior market economist at Mizuho Securities Co. in Tokyo.
Mitsubishi’s Goto says the stimulus doesn’t guarantee Japan will be able to shake off falling prices and policy makers must be prepared to take further action.
“Deflationary pressure in the Japanese economy is so strong that the measures unveiled so far won’t be enough to overcome it,” said Goto, a former Bank of Japan official. “The real issue is whether they’re going to be prepared to fire a second or third bullet when the need arises.”
Bank of Japan
The central bank released a 10 trillion yen credit program last week, satisfying calls from government ministers for it to do more to fight declining prices.
Nobuaki Koga, head of Japan’s largest labor union, applauded the government’s efforts to spur growth by saving jobs.
“This is worth praise,” said Koga, head of the Japanese Trade Union Confederation, known as Rengo. “It includes employment measures and I support the main pillars. Bigger would be better, but there are fiscal limitations.”
Recent data indicate the recovery is losing steam. Industrial production grew at its weakest pace in eight months in October and a report yesterday showed merchant sentiment tumbled by a record amount in November. Exports fell for the 13th straight month in part because of the yen’s strength.
Fujio Mitarai, head of the nation’s biggest business lobby and chairman of Canon Inc., said last month the government needs to take “urgent steps” to stem the yen’s gains.
Debt Burden
Hatoyama’s ability to revive the economy has been limited by the nation’s swelling debt burden, which is already the largest in the industrialized world. He said the package was a reflection of the government’s will to spur growth without blowing out growing public debt.
“This reflects our intention to resuscitate the economy,” Hatoyama told reporters in Tokyo yesterday. “There was a sharp debate from differing perspectives on what must be done, on whether the economy or fiscal discipline take priority, and I think that should be recognized.”
The premier’s sliding popularity may hurt his party’s momentum ahead of the July upper house elections in July 2010. His approval rating fell below 60 percent for the first time, declining to 59 percent from last month’s 63 percent, the Yomiuri newspaper reported this week.
Some say the measures, which extended policies inherited by the previous administration, are merely a stop gap to prevent the economy from deteriorating before the election.
“The package doesn’t help the economy much, the DPJ’s just afraid of being blamed if there’s a double-dip slump,” said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo. “I don’t think there’s any legitimate logic for implementing these measures except for political reasons.”
To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Keiko Ujikane in Tokyo at kujikane@bloomberg.net
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