Friday, August 29, 2008

Japan Stimulus Package

The Japanese government on Friday unveiled a Y11,500bn (US$105.8bn) economic stimulus package which includes an income tax cut, fuel subsidies and government loans to small and medium-sized companies.

The package, which includes Y1,800bn in new spending and nearly Y10,000bn in government loans and credit guarantees, comes as the Japanese economy in July suffered its biggest contraction in seven years and inflation topped 2 per cent for the first time in a decade,

The measures highlight the pressure facing Prime Minister Yasuo Fukuda amid growing public discontent over rising prices at a time when wages are stagnating and economic activity has been sluggish.

The stimulus package, however, was widely criticized as ineffective in countering the impact of the economic slump.

“It does look to me like the impact of this package will be relatively small. It’s a knee-jerk reaction to difficult economic times,” says Robert Feldman, chief economist at Morgan Stanley in Tokyo.

Not only is the actual spending small, the substance of the package is unlikely to address the fundamental problem of the Japanese economy, which is low productivity, he says.

“It will slow the deterioration of the economy just a little but it won’t lift growth,” says Akira Maekawa, economist at UBS in Tokyo.

Japan unveiled Friday plans to increase spending by about $18 billion this fiscal year, as part of an economic stimulus package to prevent the economy from stalling, and to offset the impact of high oil prices.
The stimulus package carried a headline figure of 11.7 trillion yen ($107.4 billion), but much of the amount included loan guarantees to small and medium-sized business which would not translate into direct fiscal pump-priming, analysts said.
About 2 trillion yen of the package will be contributed via a supplemental budget this fiscal year.

"It's a fairly small stimulus package," said Tokyo-based chief Japan economist for Lehman Brothers, Hiroshi Shiraishi, adding that actual new spending likely ranges between 1 trillion to 2 trillion yen.
Newswire reports said the new measures would include assistance to the agriculture sector, support for part-time workers to find better employment and rebates on toll roads. Additional spending was also to flow to healthcare, housing, education and environmental technology.
Economists said the new spending was also a popularity-boosting measure for Prime Minister Yasuo Fukuda, who is seeking to reverse his sagging approval rating ahead of the national elections which must be called by late 2009.
"It's really a political move. Does Japan really need fiscal stimulus? Will it go into a very severe recession without it? We sort of doubt it," Shiraishi said. "At this stage the economic downturn seems to be a mild one, particularly when compared to post-bubble cycles."
About 400 billion yen will go toward loan guarantees for small and medium-sized businesses, the Nikkei business daily reported.
The stimulus plan also includes a one-off income tax cut for the current fiscal year. The rate cut emerged after agreement between the ruling Liberal Democratic Party and its coalition partner, the New Komeito party, the Nikkei reported.
Details on the size of the income tax cut and how it will be implemented are still to be worked out.
Some economists believe Japan is teetering on the brink of recession, as cooling global growth weighs on demand for Japanese goods abroad. Toyota (TM:toyota motor corp sp adr rep2com
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TM 88.70, +0.70, +0.8%) (JP:7203: news, chart, profile) slashed its global sales forcast for 2009 Thursday, saying it expects to sell about 700,000 fewer vehicles next year than it had forecast previously.
Data released Friday showed the Japan's consumer price index rose 2.4% in July, its fastest pace in more than a decade, while real consumer spending decelerated for a second straight month in July, falling a real 0.5%. Other data showed a softening employment market, with about 60,000 regular workers losing jobs in July.
"We expect to see a further downturn in total employee numbers as the slowing global economy drives manufacturers to cut output and forces an increasing number of construction and real estate firms into bankruptcy," wrote Credit Suisse analysts headed by Hiromichi Shirakawa in a research note Friday.
Finance Minister Bunmei Ibuki said Friday the government will try to avoid issuing new government bonds to pay for the stimulus package.
"As the prime minister ordered us not to issue new bonds, we will try to follow his direction," Ibuki was cited as saying after a meeting between the government and the ruling coalition on the economic measures.

Japanese officials are finalizing details of an emergency economic stimulus package this week, stressing the need to bolster the country by helping citizens cope with high fuel and food prices.

But will it really work?

Economists are skeptical. The driving force behind the plan, they say, smells more like politics than pragmatism.

Announced earlier this month, the government's proposal will include measures to help agricultural and fishing businesses hit hard by soaring fuel costs. It may also seek to slash expressway tolls, expand medical services for the elderly and support small- and mid-sized firms struggling because of rising commodity prices.

Prime Minister Yasuo Fukuda and his Cabinet are expected to formally reveal details Friday, but the latest media reports speculate the package will total 2 trillion to 3 trillion yen (US$18.35-US$27.53 billion).

While the measures will provide some help to those hardest hit, they do not address fundamental issues weighing on the broader Japanese economy, said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

They won't, for example, stem soaring costs themselves or resolve the global credit crisis.

"More so than raising GDP, what the LDP really wants is to raise its approval rating," Morita said of the ruling Liberal Democratic Party ahead of lower house elections next year.

Growth in the world's No. 2 economy has come to a virtual halt against the backdrop of higher energy and materials prices, slowing exports and the global credit crunch. Second-quarter gross domestic product, which contracted at a 2.4 percent annual pace, suggests that the country teeters on the brink of recession.

Meanwhile, inflation is climbing, squeezing household budgets and undercutting business profits. Economists forecast a 2.2 percent jump in July's core consumer price index, which exclude volatile fresh food prices, when figures are released Friday.

Frustration over rising fuel prices has spilled into the streets this summer. Some 20,000 truckers nationwide staged demonstrations on Tuesday and warned they would add surcharges to cover spiraling costs.

Last month, the country's fishermen went on a massive one-day strike, an effort involving 200,000 boats and 400,000 workers.

Approval ratings for Fukuda's Liberal Democratic Party hover in the 30-percent range, pointing to an uphill battle for seats if its image doesn't get a major facelift, Morita said.

The government measures, however, may not do much more than score points with voters. Moreover, some economists question the need for a stimulus package in Japan, highlighting a silver lining amid seemingly gloomy economic data.

Japan's economy is slowing and may slip into recession, but the downturn will be extremely mild and shallow, said Glen Maguire, chief Asia economist for Societe Generale.

It "isn't screaming out for fiscal stimulus," he said. "I am surprised that the government is considering (a stimulus package), and I think unfortunately we're seeing the political cycle have prevalence over the economic cycle at this stage."

Economists cite greater resiliency to external shocks than in the past, when Japan faced excess labor, debt and capacity. Also, Japanese financial institutions have incurred smaller subprime-related losses than their U.S. and European counterparts.

"We think the relative health of the banking sector and lack of 'fat' in Japan Inc. in terms of labor and production capacity should allow Japan to weather the current downturn with limited damage," Merrill Lynch economists Takuji Okubo and Masayuki Kichikawa said in a report earlier this month.

Indeed, Bank of Japan Gov. Masaaki Shirakawa reiterated in a speech Monday that while the country's economy will probably remain stagnant for the time being, stronger fundamentals should help it skirt the sort of deep downturn that led to the so-called lost decade of the 1990s.

What Japan is also trying to avoid is adding to its massive public debt, which ballooned in the 1990s as the government launched a series of ineffective economic stimulus packages focused on big spending on public works projects.

Gross debt totaled 180 percent of GDP in 2007 — the highest level ever recorded among OECD countries.

Cabinet ministers so far have kept to the mantra of fiscal prudence in public, saying they want to avoid turning to bonds.

Regardless of how they are funded, the latest stimulus measures will be modest in scale compared with those in the 1990s, when packages often surpassed 10 trillion yen.

"So it won't really benefit the economy, but it's unlikely to hurt it either," Morita of Barclays Capital said. "It's not a plan that will have much of an impact either way."

Friday, August 8, 2008

Italy Enters Recession, But When Will It Leave?

According to preliminary data from Italy's national statistics office ISTAT this morning Italy's GDP fell 0.3 percent in the second quarter compared with the first three months of the year and was unchanged year-on-year (ie there was zero percent annual growth). Final data and a detailed breakdown for the second quarter will be released on Sept. 10, however from the basic details that we have now it is clear that Italy's economy is proving unable to lift its head in the face of the increasinglt difficult global conditions since despite the fact that first quarter, GDP rose 0.5 percent quarter-on-quarter, the annual increase was only 0.3 percent, and in the last quarter of 2007 the economy also contracted (by 0.4%). A fuller exploration to the background to Italy's present predicament can be found in my earlier RGE European EconMonitor post - Italy's Economy On The Ropes (Again).

European Central Bank President Jean-Claude Trichet stated yesterday that economic growth was expected to be "particularly weak" in the third quarter after ECB policy makers left borrowing costs at 4.25 percent, so it is not unreasonable to anticipate a second consecutive quarter of negative growth in Q3, and hence in all probability Italy is now in recession.

If we look at what indications we do already have for the third quater, Italian consumer confidence in July slumped to the lowest since 1993, when the country was also - we should note - in quite a sharp recession following abandonment of the EMS. The Isae Institute index fell to 95.8 from 99.9 in June. In November 1993, the 26-year-old index hit a record low of 95.4.

Italy's manufacturing sector contracted for the fifth straight month in July, posting its weakest performance in over six-and-a-half years, according to the results of the latest Markit/ADACI PMI survey. The Markit Purchasing Managers Index dropped to 45.3 from June's 46.9, sinking further below the 50 divide between growth and contraction.

If we look at the seasonally adjusted output index we can see that Italian industrial output has been dropping almost continually since the November/December 2006 peak, and we might well ask ourselves the question, with energy prices up where they are, when will this index ever rise again abover the late 2006 peak?

The Italian services sector purchasing managers' index also in fell in July, to a seasonally adjusted 45.6 in July from 48.5 in June. So the contraction in services continues, and even accelerates into the third quarter of the year.

And Italian retail sales declined in July for the 17th month in a row. The seasonally adjusted PMI for retail sales was at 38.2, up slightly from the 36.3 shocker registed in June. As with industrial output, we might like to ask ourselves when it will be, with Italy's ageing and destined to contract population, that retail sales will ever expand again? Exports are no the only real way for Italy to get growth, but with the competitiveness problem that Italian industry faces this is proving to be something of a Herculean labour.

Public Spending Cutback?

Earlier this week Italian Prime Minister Silvio Berlusconi survived a confidence vote in parliament over plans to raise taxes on oil companies and reduce salaries for mayors and public employees in a bid to balance the budget by 2011. Italy currently has a debt to GDP ratio of around 105% - way above the official EU limit of 60%. Italy is commited to at least achieving the common target of a balanced budget by 2011, but this looks to be fraught with difficulty to me, given Italy's very poor economic performance and all the negative headwinds going forward.

Berlusconi managed to clear this particular hurdle this time round without too much difficulty, since his allies in the lower house of parliament helped him through what turned out to be a very comfortable vote of 312 to 239 and approved the necessary amendments to current legislation, and then passed the entire package 314 to 230.

The budget increases the corporate income-tax bracket for energy companies to 33 percent from 27.5 percent and raises taxes on oil and gas inventories. Banks and insurance companies also will pay more. Finance Minister Giulio Tremonti has called the measures "Robin Hood'' taxes.

On the spending front, the government plans to cut city, town mayor and local administrator salaries by 20%. It is not clear how much of this is serious and how much "window dressing", but since the government estimates that budget cuts at ministries will generate savings of 9 billion euros ($13.9 billion) next year, the salaries of more than a few mayors and public dignataries must be involved.

The broader economic policy outlined in the budget aims at boosting revenue and cutting spending by 36 billion euros over the next three years. Even with these cuts the deficit is expected to widen to 2.5 percent of gross domestic product this year from 1.9 percent last year, largely as a result, of course, of the current recession.

Now, if the Italian government are serious about this, and we will need to watch and wait to know since past performance is far from reassuring, then it will leave us with the clear possibility going forward of seeing an Italy with negative GDP growth in full years 2008, 2009 and 2010, since the little average underlying net growth that Italy does manage to achieve these days will largely be undermined by cut-backs in government spending and the impact of continuing high energy prices on export growth.

So the big question is: are the Italian people ready for three consecutive years of falling living standards and cuts in everything, or is Berlusconi going to have trouble holding his coalition together?