While the rest of the world burns, Japan is fiddling – or so a growing number of commentators are suggesting. Tokyo seems to be unilaterally undermining its recent effort to play good citizen of the international financial community by lending $100bn in temporary funds into the IMF for emerging economies. Instead of the expected applause, there is mounting criticism of the country’s seeming inability to take serious action to shore up its economy and become more involved in international efforts to repair the international financial system.
A few weeks ago, shortly before Japan officially moved into recession, the government unveiled a Y5,000bn ($50.8bn) economic stimulus package – its second in as many months – as the prime minister, Taro Aso, in his best “serious” voice, warned of the impact of the global credit crisis on the world’s second-largest economy. “A storm that comes once in 100 years is raging,” he intoned. “We cannot stand by until it passes”.
That seemed to have fooled no one, as both domestic and western commentators quickly dismissed the package, a mish-mash of pay-outs to taxpayers, reduction in highway tolls and some Y20,000bn in loan guarantees for small and medium-sized businesses, as a pre-election voter buy-off – marginally better than the first, much smaller attempt (worth a derisory Y1,800bn – or $18bn), announced late August.
In an understated but neat way, Kyohei Morita, Japan chief economist at Barclays Capital, summed up the latest package thus: “In terms of its impact on GDP, it is very small”.
Obviously mindful that some people might get the – completely – wrong impression, Aso denied that the package amounted to a blanket distribution of funds aimed at voters ahead of an election that must be called within a year. In fact, he said later, he would ask rich people to decline the handouts. Oh, and to “deflect charges of fiscal irresponsibility”, as the FT put it, he pledged not to issue deficit bonds to pay for the package.
Furthermore, said Aso, he intends to raise consumption tax, now 5 per cent, after three years to “avoid leaving a huge bill to future generations”. Ah, just the thing for an economy now in the grip of recession.
On the same day, the Bank of Japan, using one of the remaining little tools in its toy box, shaved 20 basis points off its main interest rate to bring it to 0.3 per cent – its first rate cut in seven years – as the BoJ governor Masaaki Shirakawa noted that “economic conditions have become severe.”
Not severe enough, evidently, to prompt Japan’s policymakers into the right course of action. To fuel the ire of his numerous critics, Aso last week then suggested he would delay the stimulus package until next year to present to the Diet, or parliament, for approval, to give time to “finalise details”.
Sadly, these “pretend-fiscal stimulus” games largely eclipsed Japan’s moves to aid the IMF and also help neighbouring South Korea as it struggled with the effects of a collapsing currency.
In a column last month entitled “Land of the Sinking Sun”, the Guardian’s Justin McCurry, summed up the government’s crisis-management approach when he noted that Aso et al were coming up with the “wrong answer to the wrong question”.
For a clear indication of the crisis perception gap that has opened up between Washington and Tokyo, consider the mildly complacent tone of Japan’s new prime minister, Taro Aso. Though he described the Nikkei nosedive as “abnormal” and agreed that the US disease was spreading, he went on: “We must carefully monitor the situation and take appropriate action when needed.” Hardly the kind of reassurance that will lull investors into a sound night’s slumber.
For its efforts, [Japan] has been accused of engaging in “pantomime”. That’s not far off the mark, but given the paucity of ideas, and the magnitude of the problem that confronts them, Japan’s leaders are looking more like bit-part players in a global tragicomedy.
But the real rage is coming from the likes of the FT’s Martin Wolf, for example, who in a weekend column decried the “economic vandalism” of certain governments with highly rated debt. He stopped short of naming Japan but made it glaringly clear who he meant (emphasis ours):
Governments are not helpless. They can continue to recapitalise financial institutions. The entire funding of the US Tarp should be used for this purpose. It is ridiculous to conserve ammunition until after the battle is lost… As the deflationary danger comes closer, central banks can finance anything – above all, government borrowing. This will work much better, however, if all countries act together. For surplus countries with limited financial fragility to choose this moment to creep willingly into recession – thereby exacerbating the difficulties of the indebted, on whose demand they depended – is economic vandalism.
Unfortunately – for Japan – perhaps, and for the rest of the world, definitely – the BoJ can afford to be dogmatic – for now, as Lex noted on Friday.
Compared with other economies now sailing close to zero, Japan’s need to address corporate refinancing risks is less urgent. Moody’s reported that virtually all of its 141 non-financial-rated issuers in Japan have cash on hand or committed bank lines to cover expected outflows over the next year. Meantime, it can’t hurt to chivvy lenders along a bit: the BoJ is studying new ways of freeing up cash, such as accepting corporate debt as collateral.
In a deepening recession, however, “principles are there to be abandoned,” added Lex.
With interbank rates inching up amid news of corporate job cuts, interest-rate swaps are now suggesting a one-in-three chance of a further cut by the BoJ by March next year – despite the central bank’s disavowal of the dreaded zero.
So what do the numerous critics think Japan should do?
The BoJ does have options, note some commentators. “The BoJ pretends it has no room for manouvre (and is widely believed by BoJ fellow-travellers),” said Tokyo-based analyst Peter Tasker. “Admitting otherwise would mean admitting responsibility for deflation, which they prefer to present as some kind of natural disaster like an earthquake… like the Ministry of Finance, their main aim is to deflect responsibility for Japan’s economic problems”.
So what else could Japan do?
As Japan has a huge current account surplus, “it can afford to start saving less and consuming more,” in the view of another seasoned Japan-watcher: “It could cut taxes (NOT raise them) or increase infrastructure spending. It could also use monetary to policy to stimulate consumption also by raising inflationary expectations (the medicine prescribed in Bernanke’s famous 2002 speech)… Japanese government bond yields tell us that the ‘government debt’ crisis is a myth propagated by Japan’s ministry of finance. The BoJ also propagates its own self-serving myths. Between them they are like the imperial army and airforce in 1945.”
But, when you’re talking about Japan, you’re talking about wheels within wheels. As the FT’s Wolf pointed out five years ago – and little has changed:
The debate remains as divided as before between “supply-siders”, who emphasise microeconomic reform, “bank-siders”, who emphasise the need to recapitalise the banks, and “demand-siders”, split, in turn, between monetarists, who demand more money, and fiscalists, who recommend bigger fiscal deficits._____