Thursday, April 9, 2009

Stimulating Stuff

The Japanese government should spend a bigger-than-expected 15.4 trillion yen ($154 billion) on economic stimulus, the ruling party said on Thursday, causing bond yields to sink but boosting stocks in sectors seen benefiting from the higher spending.

The new spending should be funded by issuing new bonds, the party said in a draft proposal issued ahead of a major policy speech by Prime Minister Taro Aso later on Thursday and the announcement of the package on Friday.

Asian central banks forced into action - Apr-07Japan boosts aid to struggling companies - Apr-08Lex: Japan’s stimulus - Apr-08Lex: The Sharp end - Apr-08The stimulus spending – 3.1 per cent of GDP – is to battle Japan’s deepest recession since World War Two, which has slashed exports and corporate profits, prompting firms to cut production and lay off thousands of workers.

Bonds sank because the size of the proposed spending is higher than an earlier mooted level of around 10 trillion yen, traders said, raising the prospect of a large supply of new bonds.

But shares in automakers and solar power-related firms rose after the ruling Liberal Democratic Party proposal for measures to promote the use of solar panels and fuel-efficient cars.

The plan came out as data showed Japan’s core machinery orders unexpectedly rose in February due to gains in the services sector, in a tentative sign domestic demand may be stabilising.

Analysts warned, however, that the orders also showed that Japanese exporters continue to suffer, highlighting the challenge the government faces as it compiles additional stimulus measures to combat the worst recession since World War Two.

”Looking at the components, orders from non-manufacturers increased for two consecutive months, showing that domestic demand is starting to turn around. In contrast, external demand is still weak,” said Satoru Ogasawara, an economist at Credit Suisse.

Core private-sector machinery orders, a leading indicator of capital spending, rose 1.4 per cent in February from the previous month for the first gain in five months. The median market forecast was for a 6.7 per cent fall.]

Orders from non-manufacturers rose 3.3 per cent in February, while those of manufacturers, hit hard by the slide in exports, fell 8.1 per cent.

Machinery orders still fell nearly a third from a year earlier but the unexpected uptick added to the weight on bonds from the stimulus package. The benchmark 10-yr yield rose 2.5 basis points to a nearly five-month high of 1.480 per cent..

”Extra issuance of around 10 trillion yen is now expected given the size of the stimulus. Not surprisingly the bond market sees this as bearish news,” said Tetsuya Miura, chief fixed-income strategist at Shinko Securities.

The LDP urged the government to add 10 trillion yen to a loan guarantee scheme for small businesses and recommended subsidies for environmentally friendly cars and solar panels. Shares in Toyota Motor, maker of the ”Prius” hybrid, rose 2.4 per cent while those of Mitsubishi Motors , the only mass-volume carmaker with an electric car prototype on the road, climbed 2.8 per cent.

Sharp, the world’s No.2 maker of solar cells, surged 8 per cent while Kyocera, the world’s No.4 solar cell maker, climbed 1.9 per cent.

The package still faces a potentially stormy ride through parliament, where the opposition controls the upper house and can stall legislation.

Aso has threatened to bring forward an election due by October this year if the opposition stalls the package.

The package would add to spending of 12 trillion yen already planned under previously announced stimulus measures, taking the total stimulus spending to combat the global financial crisis to around 5.5 per cent of GDP.

The Japanese economy shrank 3.1 per cent in October-December from the previous quarter and is expected to have shrunk a further 2.5 per cent in January-March.

The contraction is bigger than in other major economies, despite Japan’s banking system being among the least damaged by the credit crisis, because of the country’s reliance on exports of cars and electronics.

Japan’s record 15.4 trillion ($153 billion) stimulus package may give a short-term boost to the nation’s economy, while leaving it saddled with a debt burden that will smother future growth, economists said.

The plan unveiled yesterday by Prime Minister Taro Aso, who faces elections this year, is aimed at creating jobs in an economy heading for the worst recession since 1945. Equal to 3 percent of gross domestic product, the measures will add to debt that the OECD already forecasts will rise to 197 percent of gross domestic product next year.

“The stimulus will probably prevent Japan from falling apart in the short term, but it will leave a massive bill for the future,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “The package doesn’t do anything to promote a sustainable economic recovery.”

The plan does little to address the nation’s liabilities, give its aging citizens confidence in their pension system, or encourage them to spend some of their 1,400 trillion yen in financial assets, according to Kirby Daley, senior strategist at Newedge Group in Hong Kong.

“The fiscal situation of the government is deteriorating faster than anyone imagined,” Daley said in an interview with Bloomberg Television. The government needs to address its debt “so the Japanese consumer feels comfortable that their pension system is viable. They will then start to unlock those savings,” he said.

Financing Package

Finance Minister Kaoru Yosano said the government will sell more than 10 trillion yen of debt to fund the spending on top of 33.3 trillion yen of bonds to be issued this fiscal year. That would take total liabilities to more than 800 trillion yen by March 2010, excluding short-term debt that the Organization for Economic Cooperation and Development uses to calculate its ratio.

The debt burden will be borne by a shrinking population that will be hard pressed to keep the economy growing fast enough in years to come, said John Richards, head debt-market strategist for the Asia-Pacific region at Royal Bank of Scotland Plc in Tokyo.

“The burden of this debt is going to be felt and it’s going to be much worse than people thought,” Richards said. “It’s going to result in higher interest rates and slower growth than Japan can otherwise achieve.”

Weighing Tax Increase

Aso, 68, said the government will consider raising the consumption tax from the current 5 percent once the economy recovers “in order to not leave a huge debt to our children.”

Bond yields are already rising, climbing to the highest in almost five months on April 9 on speculation the supply of debt will keep increasing as the government tries to spend its way out of the recession.

“Yields may rise as the government fails to give confidence that the stimulus package will improve jobs and consumption and boost tax revenue,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “Higher government bond yields may lead to higher borrowing costs for companies,” stunting investment and economic growth, Morita said.

Aso pledged to create up to 2 million jobs in the next three years and boost demand by between 40 trillion yen and 60 trillion yen by focusing on industries such as solar power, electric cars and energy-saving consumer electronics.

That compares with the 3.5 million jobs U.S. President Barack Obama pledged to save or create with his $787 billion stimulus package. The 25 trillion yen in total spending announced by Aso since he became prime minister in September is about 5 percent of GDP, a ratio comparable to the U.S. stimulus.

Boost Demand

“Aso is very optimistic” on that jobs creation number when you compare it with Obama’s plan, Daley said. “When you throw $150 billion at an economy in one year, you will see an effect. It will not be long term, nor sustainable.”

The Nikkei 225 Stock Average erased its losses for the year as details of the stimulus were leaked by ruling party officials during the week. Economists said the plan would help moderate the economy’s deterioration later this year.

“This new package likely will significantly boost domestic demand, mainly in private consumption and government investment, from the third quarter,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo.

Analysts said that fixing the country’s long-term fiscal problems is the key to stimulating domestic consumption and weaning the country off its export dependence.

Japan’s older generation is reluctant to spend after the government revealed two years ago that it had lost pension records for 50 million people, or more than a third of the entire population. Younger people are growing concerned that the system will have run out of money by the time they retire.

Retirement Worry

A record 84 percent of Japanese are worried about retiring because they say they lack savings, an annual Bank of Japan survey showed in October.

“What households and the elderly need to see in order for them to start spending money is evidence that they don’t have to worry about retirement,” said Shirakawa at Credit Suisse. “The government isn’t providing any relief or convincing plans for the future. It’s all cheap talk by politicians.”

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