Betty Rui Wang
Northeast Asia economist
Standard Chartered
A possible government shutdown in Japan is in imminent danger as the political standoff throws the passage of the government’s funding bill into question. The development of this issue, despite recently having turned in the right direction, is delivering a threat to the economy. The embarrassing fiscal condition is not only the trigger of this round of funding crisis; it’s an ever-lasting headache to the government.
The government took the brave but controversial step this year to raise the sales tax from 5% to 10% starting from 2014, in order to help improving its fiscal balance over the next couple of years. This has been welcomed by the market but it risks hurting domestic consumption and vulnerable economic growth.
Indeed, Japan’s economy has lost its steam for decades. The tentative revival in early 2011 was slammed by the disastrous earthquake and following global economic slowdown. Lacking fiscal ‘bazooka’, the government consistently called for the Bank of Japan (BoJ) to adopt aggressive monetary policy. However, the co-existence of a zero policy rate and deflation gives the BoJ little room to manoeuvre the policy rate, and instead means it has to rely on quantitative easing.
Given that the current BoJ’s conservative stance determines that easing can only be conducted in a gradual manner, we don’t expect any impressive steps from the BoJ in the near future. In our view, generating domestic demand is the most reliable way for Japan to achieve sustainable growth and rescue the economy from the liquidity trap.
According to International Monetary Fund (IMF) calculations, Japan’s output gap is expected to stay negative through 2016 at least, indicating the country’s huge potential – and need – to both create and boost domestic demand.
Junko Nishioka
Chief economist Japan
Royal Bank of Scotland
Chronic political turmoil in Japan has cast a shadow on the nation’s financial condition. As the Noda administration’s approval rating deteriorates, opposition parties are increasing pressure on the ruling party to dismiss the Diet [parliament] by the year-end in exchange for approval on deficit financing bills.
Of the ¥90 trillion (US$1.13 trillion) of general revenue for the 2012 financial year, the government has allocated ¥38 trillion for issuance of a deficit financing bond, which requires the passage of the bills. Otherwise, the government’s funding sources will dry up during this month, according to the Ministry of Finance’s (MoF) press release on September 7. This in turn could have a severe impact on local government administrations as the tax allocation grants are financed by issuance of deficit financing bills.
Not only would this political uncertainty negatively affect government spending by this fiscal year end, it could also damage the credibility of Japan’s sovereign credit rating. While Japan’s fiscal condition remains severe, with around 200% of gross debt outstanding over gross domestic product (GDP) and close to a 10% deficit over GDP, some credit rating agencies have warned that an unstable government is a risk factor for fiscal reconstruction.
Currently, the Japanese government bond (JGB) risk premium remains low, relying on sustained current account surplus, room for tax hike and around 50% of net asset over GDP. However, the current account position is deteriorating, especially after the natural disaster last year, and it is hard to count on consecutive tax increases given it took 17 years to pass the bill for a consumption tax hike.
Technically speaking, as central and local administrations would be able to raise funds by other means, we think the direct impact of non-passage of the deficit financing bills on business activities should be relatively short-lived. Instead, we believe fallen credibility triggered by lame-duck government is the more serious issues, as it could lead to a rise in risk premiums and accordingly increase the issuance cost of JGBs.
Takahira Ogawa
Director of sovereign ratings
Standard & Poor’s
Japan's political course over the next few years depends on the combined results of the two elections it must hold by the end of September 2013.
The elections could end Japan's parliamentary deadlock, known here as a "twisted parliament," by which each of the two major parties controls a chamber of parliament. This has produced an impasse in the law-making process similar to that in a hung parliament. The elections also have the potential to produce a reorganisation of political forces.
Voters in Japan have directed seats away from the incumbent government in each of the three national polls held since 2007. We believe these results reflect voter frustration and disappointment with the record of the Democratic Party of Japan that is in control of the government. However, splitting parliamentary power between the major parties in the manner of a twisted parliament weakens the government's ability to execute its policy objectives.
An election outcome that gives one party, or coalition of parties, control over both houses of parliament would improve the new government's ability to implement its policies, including fiscal consolidation and structural reforms. If the twisted parliament goes unresolved, political uncertainty will continue.
We see potential for acceleration in the fragmentation of Japan's key political parties, which would slow or hamper implementation of fiscal consolidation and structural reforms, such as reforms of the social security system, deregulation to promote private sector business and improve productivity in domestic-oriented industries, and measures to help working mothers.
We would regard such a stalemate in parliament as negative for Japan's sovereign ratings unless the major parties agree on a common understanding and basic policies to get necessary reforms moving. If they do not, it is possible the country's growth prospects will remain low and the government's ability to repay its debts will erode further.