December 8, 2023

Rising Price Index Hints at Rebound in Japan

TOKYO — Japanese consumer prices rose in June at their highest annual pace in nearly five years in an early sign of an end to persistent deflation, boding well for the central bank’s bold stimulus plan to achieve its 2 percent inflation target in two years.

The 0.4 percent rise in core consumer prices, which is slightly higher than a median market forecast for a 0.3 percent increase, was largely because of a rise in electricity bills and a weak yen that inflated the cost of gasoline imports.

But it is an encouraging sign for the Bank of Japan, eager to end 15 years of grinding deflation, because it suggests that more companies are optimistic enough about the economy to believe they can raise prices or at least not cut them.

The data is also a boost to Prime Minister Shinzo Abe’s sweeping pro-growth policies that aim to pull the world’s third largest economy out of stagnation.

Mr. Abe’s government, which is driving an aggressive policy mix of monetary and fiscal stimulus to foster sustainable long-term growth, has already seen positive signs as first-quarter data showed Japan was the fastest-growing major economy in the world.

The increase in the core consumer price index, which excludes fresh food but includes energy costs, was the highest annual pace since a 1 percent rise in November 2008. It is the first time in 14 months that consumer prices have risen. (In May, prices neither rose nor fell.)

Tokyo core C.P.I., a leading indicator of nationwide prices, rose 0.3 percent in July after a 0.2 percent increase in June, matching the median forecast, suggesting prices will continue to rise in the coming months.

The Bank of Japan unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 percent inflation target in roughly two years.

Many analysts expect prices to gradually rise, reflecting improvements in the economy, but they view the two-year time frame for achieving the inflation goal as too ambitious.

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Japan Approves $116 Billion in Emergency Economic Stimulus

TOKYO — The Japanese government approved emergency stimulus spending of more than $100 billion on Friday, part of an aggressive push by Prime Minister Shinzo Abe to kick-start growth in Japan’s long-moribund economy.

Mr. Abe also reiterated pressure on Japan’s central bank to make a firmer commitment to stopping deflation by pumping more money into the economy — a measure the prime minister says is crucial to getting businesses to invest and consumers to spend.

“We will put an end to this shrinking, and aim to build a stronger economy where earnings and incomes can grow,” Mr. Abe told a televised news conference. “For that, the government must first take the initiative to create demand, and boost the entire economy.”

Under the plan, the Japanese government will spend about 10.3 trillion yen (about $116 billion) on public works and disaster mitigation projects, subsidies for companies that invest in new technology and financial aid to small businesses.

The government will seek to raise real economic growth by 2 percentage points and add 600,000 jobs to the economy, Mr. Abe said. The measures announced Friday amount to one of the largest spending plans in Japan’s history, he stressed.

By simply talking about stimulus measures, Mr. Abe, who took office late last month, has already driven down the value of the yen, much to the relief of Japanese exporters whose competitiveness benefits from a weaker currency.

But the government’s promises to spend its way out of economic stagnation also raise concerns over Japan’s public debt, which has already mushroomed to twice the size of its economy and is the largest in the industrialized world.

At the root of Japan’s debt woes was a similar attempt in the 1990s by Mr. Abe’s own Liberal Democratic Party to stimulate economic growth through government spending on extensive public works projects across the country.

Mr. Abe said, however, that the spending this time around would be better focused to bring about growth through investment in innovation. He said the government would also invest in measures that would help mitigate the fall in Japan’s population, by encouraging families to have more children.

“To grow in a sustainable way, we must help create a virtuous cycle where companies actively borrow and invest, and in so doing raise employment and incomes,” Mr. Abe said.

“For that, it is extremely important that we adopt a growth strategy that gives everyone solid hope that the future of the Japanese economy lies in growth.”

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European Central Bank Moves to Head Off Credit Crunch

But stocks fell after Mario Draghi, the E.C.B. president, quashed hopes that the bank might drastically scale up its purchases of euro area government bonds to help contain the sovereign debt crisis. Yields on Italian and Spanish bonds rose, an indication that investors were more pessimistic about those countries’ creditworthiness.

At a news conference, Mr. Draghi said he was “surprised” that comments he made last week were interpreted as a signal that the E.C.B. would buy more bonds if political leaders, who are meeting Thursday and Friday in Brussels, delivered tougher rules on budgetary discipline.

“While Draghi had opened the door for more E.C.B. support last week, he closed it again today,” said Carsten Brzeski, an economist at Dutch bank ING. “According to Draghi, it was up to politicians to solve the debt crisis.”

On Thursday evening European leaders were to begin their latest summit meeting on the sovereign debt crisis that threatens to stifle economic growth far beyond Europe’s shores.

Taken together, the moves showed that Mr. Draghi, president of the E.C.B. for just over one month, is willing to break with precedent to combat the crisis, even as the bank awaits the outcome of the Brussels meeting.

At the same time, Mr. Draghi seems to remain unwilling to violate the ultimate E.C.B. taboo and effectively print money by buying bonds in massive quantities. Mr. Draghi also threw cold water on expectations the E.C.B. might use the threat of deflation as a justification to expand the money supply.

“We don’t see any high probability of deflation,” he said.

The E.C.B. cut its key rate to 1 percent from 1.25 percent, as expected, returning it to the record low level that had prevailed from 2009 until earlier this year.

The central bank also announced additional measures to aid euro area banks suffering from a dearth of money-market funding. The E.C.B. said it would begin giving banks loans for three years, compared to a maximum of about one year previously. The move means the E.C.B. is intervening for the first time in the market for medium-term bank funding.

Banks will be able to borrow as much as they want at the benchmark interest rate. They must provide collateral, but the E.C.B. on Thursday also broadened the range of securities it accepts, which will help banks that have large amounts of assets that are hard to sell on the open market. The E.C.B. also eased its requirements for reserves that banks must maintain.

The measures will also help smaller community banks that may not have been able to borrow from the E.C.B. because they lack the required collateral, Mr. Draghi said.

In a sign of how badly banks need the money, 34 institutions took advantage Wednesday of a new lower interest rate offered by the E.C.B. in conjunction with other central banks for three-month loans denominated in dollars. The banks borrowed a total of $50.7 billion.

Mr. Draghi, who took over the E.C.B. from Jean-Claude Trichet on Nov. 1, has wasted little time reversing the rate increases imposed in April and July. Those policy moves were widely criticized as an overreaction to tentative signs of inflation and may have helped hasten a widespread economic slowdown in Europe.

Lower interest rates will be particularly welcome in countries like Portugal and Italy, where the debt crisis has pushed up market interest rates and made it harder for businesses to get loans.

At their summit meeting Thursday night and Friday, E.U. leaders were to discuss ways to impose more central control on government spending to avoid future debt crises. Mr. Draghi had suggested that more action could follow if leaders made serious progress. But following his comments Thursday it is unclear what those measures might be.

The European economy is almost stagnant, growing just 0.2 percent in the third quarter, with unemployment at 10.3 percent. Economists expect the economy in the 17 E.U. nations that use the euro to slip into recession early next year if it has not already. Declining output makes the debt crisis even worse by cutting tax receipts.

Earlier Thursday, the Bank of England held its benchmark rate steady at 0.5 percent.

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Fed Committee Even More Divided, Minutes Show

The Federal Open Market Committee voted at the end of a two-day meeting in September to begin a new effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.

The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.

The internal divisions were partly the product of a lack of clarity about the health of the economy. In its predictions since the end of the recession, the Fed has repeatedly overestimated the pace of economic growth, and the minutes report that the board does not understand why it has been wrong.

“It was again noted that the cyclical impetus to economic expansion appeared to be weaker than in past recoveries, but that the reasons for the weakness were unclear,” the minutes said.

The Fed announced in August that it intended to maintain short-term interest rates near zero for at least two more years. In September, it announced an effort to further reduce long-term interest rates by moving $400 billion from investments in short-term Treasury securities to longer-term Treasury securities. Both policies aim to cut borrowing costs for businesses and consumers.

The Fed’s chairman, Ben S. Bernanke, has made clear that the central bank is willing to keep trying to bolster the economy if necessary, but also that there will be a high bar for further action. In particular, he has said that the Fed is most likely to act if the pace of inflation abates to the point where there is a risk of declining prices and wages. Such deflation would damage growth.

The minutes, which are normally released three weeks after a policy decision, made clear that the Fed had not changed its view that the pace of inflation was likely to remain at roughly 2 percent a year, the rate that the Fed considers most healthy.

“Participants generally judged that there was relatively little risk of deflation,” the minutes said.

In the absence of any fear of deflation, the minutes suggested that the Fed was unlikely to seriously consider another round of asset purchases, the most powerful arrow left in its quiver.

The minutes do note, however, that “a number of participants” said that they regarded such a plan as “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.”

The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy.

The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.

The committee next meets on Nov. 1 and 2.

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Moody’s Warns of Possible Downgrade to Japan’s Debt Rating

HONG KONG — Moody’s warned on Tuesday that it may downgrade its sovereign debt rating for Japan, joining other ratings agencies in taking a more pessimistic view of the Japanese economy after the March 11 earthquake and tsunami.

The disaster hit an economy that was already struggling with persistently anemic growth, periodic deflation, an aging population and high government debt levels.

Moody’s kept its rating for Japanese bonds unchanged at Aa2, but said its decision to review the rating for a possible downgrade had been prompted by “heightened concern that faltering economic growth prospects and a weak policy response would make more challenging the government’s ability to fashion and achieve a credible deficit reduction target.”

Without an effective strategy, the ratings agency said, government debt “will rise inexorably from a level which already is well above that of other advanced economies.”

Although a financing crisis is unlikely in the near- to medium-term, “pressures could build up over the longer term,” Moody’s said. “Moreover, at some point in the future, a tipping point could be reached, and at which the market would price in a risk premium to government debt.”

The Japanese economics minister, Kaoru Yosano, said in a news conference in Tokyo that he was unhappy about Moody’s move but added that the government must preserve fiscal discipline.

“The government and politicians must always bear in mind the need to maintain fiscal discipline and must act to achieve this end,” Mr. Yosano said, Reuters reported.

Unlike most of the rest of Asia, the Japanese economy had not yet fully recovered from the impact of the global financial crisis, and the massive economic and fiscal costs of the March 11 disaster have caused the economy to contract sharply, tipping Japan into its second recession in less than three years.

Data published on May 19 showed that Japan’s economy shrank at an annual rate of 3.7 percent in the first quarter.

A rebound is widely expected to kick in once rebuilding work gathers momentum, and as battered supply chains normalize.

The Economy and Trade Ministry reported on Tuesday that industrial output in April climbed 1 percent from the previous month, a marked improvement from the 15.5 percent plunge in March. The rise was below what analysts had expected, but nevertheless supported the overall picture of an economy that is clawing its way back to pre-quake levels.

Anecdotal evidence — news of factories opening up again and of companies normalizing production plans — has shown that the situation continued to improve in May, economists at Credit Suisse in Tokyo wrote in a research note. Industrial production, they wrote, “is moving toward a V-shaped recovery.”

Still, power shortfalls and the lingering crisis at the earthquake-stricken Fukushima Daiichi nuclear power plant cloud the overall picture.

In addition, Japan’s government debt levels are by far the largest among the world’s major advanced economies, while growth in the medium term is unlikely to rise much above an annual rate of 1 percent, despite the expected post-quake rebound, many analysts say.

Moreover, political infighting hampers the ability of the government to achieve a steady reduction in the budget deficit.

“New fiscal measures are unavoidably necessary to close the primary deficit,” Moody’s said in its report on Tuesday. “To that end, the government intends to introduce a comprehensive tax reform program in June. However, Japan’s divided Diet — in which the opposition Liberal Democratic Party controls the Upper House — and the intensifying level of political challenges” to Prime Minister Naoto Kan “continue to threaten to bog down such efforts.”

The assessments echo those by Standard Poor’s, which downgraded its rating for Japan to AA- in January and lowered its outlook on that rating to negative in late April.

Fitch Ratings also lowered its outlook for Japan to negative last week, and likewise said a “stronger fiscal consolidation strategy” was necessary.

The Japanese stock market, meanwhile, shrugged off the warning from Moody’s. The Nikkei 225 index closed 2 percent higher, at 9,693.73 points, on Tuesday.

The index has recovered from the low of 8,605.15, plumbed in the week after the quake, but remains below the level of 10,360 points, where it was shortly before the quake struck.

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Japan Lowers Its Economic Outlook

HONG KONG — In the latest sign of the economic toll wrought by the natural disasters last month in Japan, the government in Tokyo lowered its assessment of the Japanese economy for the first time in six months on Wednesday.

The economy is expected to start to recover from the severe earthquake-induced downturn later this year, the cabinet office said in its monthly economic report for April.

But for now, exports, private consumption, corporate profits and the job market remain under pressure, further weighing on the economy. Japan had already been struggling with deflation, persistently anemic growth and a seemingly intractable government debt burden well before the devastating earthquake and tsunami that struck March 11.

“Weakness will continue for a while” because of the catastrophes, the cabinet office said in a statement, which was noticeably more bleak than the assessment it issued soon after the quake in March.

The assessment echoed that of the Japanese central bank, which said last week that the economy was “under strong downward pressure” and that there was “high uncertainty” about the possible effects of the disaster on the economy.

Apart from the direct material damage wrought by the quake and tsunami on the northeast of the country, which the government has estimated could reach ¥25 trillion, or about $300 billion, the calamity in turn set off a crisis at the Fukushima Daiichi nuclear power station, which has been leaking radiation.

The condition of the damaged reactors is “static,” but with improvised cooling efforts, they are “not stable,” the chairman of the U.S. Nuclear Regulatory Commission, Gregory B. Jaczko, said Tuesday.

The power shortages resulting from damage to Japan’s energy infrastructure have hampered daily life and business activities in large parts of the country and caused considerable disruption to the flow of spare parts and components to manufacturers in Japan and beyond. Periodic aftershocks, some severe, have also hampered the country’s efforts to return to normal.

Companies have been gradually starting to resume activities at some of the many plants that had to be idled after the disaster.

The steel-making giant Nippon Steel said Wednesday that it had resumed production of wire rods at its Kamaishi plant in Iwate Prefecture.

Renesas Electronics, which makes chips used by the consumer electronics and car sectors, has said it is preparing to resume manufacturing at three plants.

However, many companies continued to caution that the longer-term outlook remained unclear, and activities in many cases are still below normal.

For example, Toyota, Nissan and Honda, the country’s biggest car manufacturers, said last week that they would begin to resume operations at their affected plants in Japan, but all said they would do so at only 50 percent capacity.

Toyota cautioned that it had yet to decide on what its Japan plants would do after the annual spring holiday in May.

Underscoring the lingering disruption to its operations, Toyota said Wednesday that it would suspend production at five vehicle and engine manufacturing plants in Britain, France, Turkey and Poland for several days in April and May because of parts shortages.

In another example of interrupted supply lines, the property services manager CB Richard Ellis said Wednesday that the warehouse vacancy rate in Tokyo had fallen to the lowest level since December 2007 because of a surge in demand for short-term leases following the earthquake and tsunami.

In the longer term, economists say they believe the economy will see a pronounced rebound during the second half of the year, as reconstruction activity kicks in and manufacturers race to meet orders that were delayed.

Analysts expect only a temporary effect on companies’ bottom lines.

“Japanese earnings will take a big hit from the March 11th disasters, and will not likely recover before a couple of quarters have passed,” analysts at LGT Capital Management wrote in a note Wednesday. On balance, however, “the global impact should be limited in the short term and positive over the longer term.”

The cabinet office echoed this sentiment Wednesday, saying that as production activities return to normal, “the economy is expected to resume picking up, reflecting improvement in overseas economies and the effects of various policy measures.”

The government is currently preparing an initial emergency budget of about ¥4 trillion, officials have said.

And the central bank, in an immediate reaction to the turmoil last month, beefed up an asset purchase program and intervened in the foreign exchange markets to stop a sharp rise in the yen. It also announced a loan program totaling ¥1 trillion to financial institutions in the disaster area, in a bid to help them extend reconstruction-related loans.

Many economists have lowered their 2011 growth forecasts for Japan, the world’s third-largest economy after those of the United States and China. But the expectations of an upturn later in the year mean that the revisions have for the most part been slight.

In its latest World Economic Outlook, for example, the International Monetary Fund said Monday that it expected the Japanese economy to expand 1.4 percent this year, rather than the 1.6 percent it had projected before the earthquake.

In a separate report Tuesday
, however, the fund said the need for reconstruction-related spending meant the country would have to step up its fiscal consolidation.

The message served as a reminder of the underlying economic challenges that Japan faced even before the earthquake struck.

High debt levels had already earned Japan a downgrade from the ratings agency Standard Poor’s in January, and they severely curtailed the government’s ability to issue new debt to finance reconstruction and other economy-bolstering measures. Officials have, in fact, stressed that they do not intend to tap the bond markets to fund the emergency budget that is being crafted at the moment.

Among the biggest uncertainties for the coming months, meanwhile, are the extent to which consumer sentiment and spending have been hurt and the duration of the electricity shortages that have been caused by the crisis at the nuclear facility at Fukushima.

“The biggest factor that will bring uncertainty is whether there will be enough electricity, in other words whether the ongoing nuclear crisis can be settled without further deterioration in the situation,” Kaoru Yosano, the Japanese economy minister, said Wednesday in a televised news conference.

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