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Japan Cabinet Oks Blueprint for Spending Cuts

August 8, 2013 by

Prime Minister Shinzo Abe has meanwhile deferred until later this year a decision on hiking Japan’s sales tax, which might help fortify public finances, but could do more harm than good if it derails the economic recovery nurtured by Abe’s government.

Japan’s public debt amounts to more than twice the size of its economy, which is the world’s third largest. Earlier this week, the International Monetary Fund reiterated its call for a “credible” fiscal plan to help bring it under control. Abe is expected to respond to that call at a summit of the Group of 20 major developed and emerging economies early next month.

The plan approved Thursday would slash social security spending and reduce public works costs by 10 percent. So far, Abe has focused on boosting spending to stimulate growth and fight deflation. Economists say the still-fragile recovery can be sustained only if the government tackles difficult reforms needed to improve Japan’s competitiveness and counter the impact of a fast-aging and shrinking population.

Abe’s ruling party controls both houses of parliament but it’s unclear whether the plan can win the approval of lawmakers without being significantly watered down. Cuts to benefits such as old age pensions are politically unpalatable for a fast-greying electorate.

Japan’s Finance Ministry and its central bank, which wrapped up a monthly policy meeting Thursday with no change in its extreme monetary easing policies, have pushed for stronger fiscal discipline, warning investors will lose confidence in the country’s financial health if the debt continues to grow.

Bank of Japan Gov. Haruhiko Kuroda said the central bank left unchanged its economic assessment that a moderate recovery is happening, but did see some signs of improvement from the month before.

Kuroda reiterated his support for going ahead with the sales tax hike, saying he expects the economic outlook to continue to strengthen. Original plans called for a 3 percentage point increase in the current tax to 8 percent next April, to be followed by another 2 point increase in 2015.

The fiscal blueprint, which is part of the budget process for fiscal 2014, would reduce the government’s deficit by 17 trillion yen ($176 billion), or half, over the next two years, to help curb the issuance of fresh government debt. A key element of that reduction would come through lower spending on social security, such as old-age pensions and welfare.

It comes as the government mulls spending hundreds of millions of dollars to contain radiation-contaminated water at a nuclear plant wrecked by the March 2011 tsunami.

Plans call for spending 30 billion to 40 billion yen ($300 million to $400 million) on efforts to solidify ground surrounding reactor buildings at the plant in Fukushima to prevent underground water from entering contaminated buildings. That would be in addition to an 8.7 billion yen ($90 milllion) budget this year for decommissioning projects including development of robots to locate and remove debris from melted reactors.

The nuclear disaster is one of several massive drains on national finances. Neglect of the country’s infrastructure has left many tunnels, dams and bridges in need of urgent repairs. Surging pension and health care costs for the growing elder population are among other pressing concerns.

So far, flooding the economy with cash appears to have helped support a recovery, with growth at 4.1 percent in the January-March quarter. Data for April-June, due for release Monday, are expected to show growth at about 3.5 percent.

But a Cabinet survey released Thursday showed that confidence among people with jobs sensitive to economic conditions, such as restaurant workers and taxi drivers, worsened for the fourth straight month in July. The government said extreme heat was partly to blame, as people stayed home rather than venturing out to eat and shop.

With the government already reining in spending to address fiscal concerns, and the sales tax hike due to dent consumer demand if it takes effect in April, future growth will depend on higher corporate investment and wages, Moody’s Investor’s Service said in a report. Otherwise, the government risks increasing debt without spurring enough growth to pay for it.

But a key adviser to Abe, economist Koichi Hamada, said Thursday that he was concerned the tax hike would cause too much of a setback.

“It would be a pretty big shock,” he told reporters.

Article source: http://www.nytimes.com/aponline/2013/08/08/world/asia/ap-as-japan-economy.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Global Markets Rise on Central Bank Comments

July 4, 2013 by Leave a Comment

World stocks shrugged off worries over political turmoil in Egypt and rallied strongly Thursday on optimism that easy monetary policy from central banks in Europe is set to continue for some time to come.

The biggest gains were in Britain, where the Bank of England surprised markets after its first monetary policy meeting held under its new governor, Mark J. Carney. It said afterward that expectations it would raise rates in coming months were unwarranted, despite the improving economic backdrop.

Meanwhile, the European Central Bank kept rates at record low rates. Its president, Mario Draghi, said for the first time that the central bank would keep rates there “for an extended period of time.”

Stocks surged after each statement.

Britain’s FTSE 100 index jumped 3.1 percent to close at 6,421.67 points while Germany’s DAX rose 2.1 percent to 7,994.31. France’s CAC 40 gained 2.9 percent to 3,809.31.

United States markets were closed for Independence Day.

The central bank statements contributed to strong declines in the euro and British pound against the dollar. Looser monetary policies tend to weaken a currency as low interest rates mean lower returns on investments and more attractive opportunities can be found elsewhere. The euro fell 0.7 percent to $1.2916, while the British pound fell 1.4 percent to $1.5066.

Financial shares were among the strongest gainers, with Royal Bank of Scotland stock rising 5.1 percent, Barclays up 4.7 percent and HSBC up 4.6 percent.

Earlier in Asia, Hong Kong’s Hang Seng Index was the strongest gainer, rising 1.6 percent to 20,468.67 points. China’s Shanghai Composite rose 0.6 percent to 2,006.10.

Tokyo’s Nikkei 225 bucked the trend, slipping 0.3 percent to 14,018.93, despite remarks from the Bank of Japan governor, Haruhiko Kuroda, that the country’s economy is headed for recovery.

The dollar gained fractionally against the yen, just passing the 100-yen mark to 100.01 yen.

Mike McCudden, head of derivatives at Interactive Investor, noted that while physical exchanges are closed on Wall Street, futures are still trading, and they indicated Wednesday’s rally on the back of economic data has continued, with Dow Jones industrial index futures now trading above 15,000. The index closed at 14,988.50 Wednesday.

“Whether this can be sustained will clearly be reflected by what’s happening on a global basis,” he said in a note on markets. “The situation in Egypt remains hugely sensitive, whilst resurgent euro zone woes could knock sentiment.”

Investors around the world were also keeping a close watch on the price of oil, which has passed $100 a barrel for the first time since May 2012 because of Wednesday’s events in the Middle East: Egypt’s military overthrew Mr. Morsi, the country’s first democratically elected president, after he defied calls to resign despite the demands of millions of protesters.

Egypt is not an oil producer but its control of the Suez Canal — one of the world’s busiest shipping lanes, which links the Mediterranean with the Red Sea — gives it a crucial role in maintaining global energy supplies. Oil has eased somewhat from its Wednesday highs and was down 41 cents to $100.83.

Over the last few weeks, markets have sputtered amid speculation that the Federal Reserve might taper off its policy of buying $85 billion in bonds every month to keep interest rates low and encourage spending.

But on Wednesday, unemployment and jobs data out of the United States were just right for stocks, analysts said: good enough to restore confidence that the American economic recovery is continuing, but not so good that the Fed is likely to pull back on stimulus.

“We have had a period of extreme volatility, and now we have some settling going on,” said Lorraine Tan, director at Standard Poor’s equity research in Singapore. “I think there’s a realization that the reaction may have been overdone.”

Article source: http://www.nytimes.com/2013/07/05/business/daily-stock-market-activity.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Getting Japan to Spend

June 28, 2013 by Leave a Comment

“Things are generally looking brighter, aren’t they?” Mr. Horii said, as he scrutinized, then dismissed, cheaper alternatives at the bustling Yodobashi Camera electronics store. The Bose ones he has his eye on, which he’ll hook up to his TV, go for about $400.

“I don’t really need it, but I want it,” he said. “A good economy means you can buy things you don’t really need.”

Prime Minister Shinzo Abe’s bid to revive Japan’s deflated economy hinges on consumers like Mr. Horii starting to feel flush enough to start splurging on the finer things in life.

A wide recovery in consumer spending has been the weakest link in “Abenomics,” the bold economic stimulus strategy that Mr. Abe has pushed since taking office in late December.

Abenomics has already brought big profit bumps to the nation’s exporters, thanks to a yen made weaker by Mr. Abe’s aggressive policies. He found a kindred spirit in Haruhiko Kuroda, the Bank of Japan’s new governor, who has committed the central bank to easing the money supply and reinflating the economy. Stock markets have rallied, as foreign investors jumped back into a country they had all but written off for its seemingly unshakable stagnation.

Numbers released on Friday by the government provided more proof of Japan’s corporate recovery. Industrial production rose by a robust 2 percent in May from the previous month. Tokyo’s benchmark Nikkei index climbed 3.5 percent Friday on the strong showing.

Reversing a 15-year-long slide in prices, which Mr. Abe has singled out as both a cause and a symptom of waning profits, wages and consumption, is a tougher order. For companies to feel confident enough to start raising prices, Japan’s consumers have to start spending again, and data confirming that trend is still mixed.

Separate figures released on Friday showed that household spending fell 1.6 percent in May from a year earlier, confounding economists’ expectations of a 1.3 percent rise. Still, for the first time in seven months, Japan’s core consumer prices in May did not fall compared to the previous year, staying flat for that month after falling 0.4 percent the previous month.

“We are comfortable with our view that the uptrend of consumption continues,” Masamichi Adachi, Tokyo-based economist at JPMorgan Securities Japan, said in a note Friday. “An expected rise in summer bonuses, paid in June and July, and improvement in general sentiment are the main reasons,” he said.

There are some signs that after years of penny-pinching, conspicuous spending is on the rise again in Japan. But for now, it is starting at the very top, among the financiers, professionals and other well-to-do Japanese who have benefited from the recent stock market gains.

Sales of Ferrari cars in Japan have jumped almost 20 percent so far this year, figures from the Japan Automobile Importers Association show, thanks to this newfound exuberance among the nation’s rich.

“We’ve seen confidence start to explode over the last months,” said Herbert Appleroth, chief executive of Ferrari Japan. “We’re seeing some of the highest growth in the world here.”

At the Hankyu Umeda department store in Osaka, sales of luxury watches, jewelry and other luxury items are surging, which lifted overall sales in May by 63 percent compared with the previous year, the sixth straight month of double-digit increases.

“Japanese shoppers are tired of cheap,” said Keiji Uchiyama, manager of the marble-floored store, brimming with imported fragrances, pastel macaroons and slick designer bags. “They’ve scrimped for so long, but now they’ve had enough,” he said.

Article source: http://www.nytimes.com/2013/06/29/business/global/japanese-consumers-start-to-buy-tentatively.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Japan’s Policy to Weaken Yen Has a Global Effect

April 8, 2013 by Leave a Comment

PARIS — The Bank of Japan’s extraordinary new anti-deflation policy was making waves throughout the global financial system Monday, driving down the yen and lifting share prices in Tokyo, but economists said the effect has yet to be fully felt overseas.

The most visible sign of the central bank’s move was the sharp decline of the yen and a 2.8 percent rise in the benchmark Nikkei 225 stock average. The dollar was trading at ¥98.905 on Monday afternoon in New York, a four-year high. The euro traded at ¥128.75, its highest level in more than three years.

“They’re taking a page out of the quantitative easing playbook, multiplied two and a half times what the Fed is doing,” said Michael Strauss, chief investment strategist at Commonfund in Wilton, Connecticut.

That, he said, creates a situation where both institutions and individuals are facing pressure to buy equities, at home and overseas.

The shake-up was touched off Thursday by Haruhiko Kuroda, the new Bank of Japan governor, who announced a decisive break with his predecessor’s policies, saying the bank would nearly double the amount of Japanese currency held by individuals and banks over the next two years as the institution tries to raise the annual inflation rate to its new 2 percent target.

Mr. Kuroda’s plan calls for the central bank to inject nearly ¥62 trillion, or $630 billion, into the economy this year, new money that must find a home. Some of that will undoubtedly end up overseas.

“This is a very big new injection of money into the global system,” said Thomas Mayer, senior adviser to Deutsche Bank in Frankfurt, and overseas bonds and equities will be among the beneficiaries.

U.S. bonds and stocks, which are already trading near record levels, are one obvious target for investors with yen to spend, he said. Core European countries like Germany, France and Britain are also favored destinations for Japanese capital, as are Australia and New Zealand.

Debt of governments in the developed world is already trading at very low yields, Mr. Mayer noted, but as long as the euro zone crisis continues, struggling southern euro countries like Spain, Italy and Portugal may attract rather less investor interest because of concern about political risk.

While the size of the Japanese intervention is perhaps unprecedented relative to the size of the country’s economy, the Bank of Japan is not alone. The Federal Reserve, the Bank of England and the European Central Bank have all poured in liquidity and worked to hold interest rates down as the global financial sector creaks along year after year. That money is credited with helping to keep government borrowing costs low and to push the Dow Jones industrial average to a record high this month.

A weakening Japanese currency opens a window for international investors to profit on two fronts. With the central bank’s main interest rate target near zero, they can borrow the Japanese currency cheaply, then lend it abroad.

This “carry trade” offers the possibility of higher returns overseas — and if the yen falls, investors also reap a foreign-exchange gain since they can repay the loan in cheaper yen.

Of course, a rising yen would bring the opposite result, but the magnitude of the central bank’s plan could convince investors that the currency is set to fall further.

Julian Jessop, chief global economist at Capital Economics in London, estimated that the dollar would continue strengthening to ¥110 this year and to ¥120 next year.

“The Bank of Japan’s new policy stance surely does amount to a game-changer,” he noted, “at least for the currency markets.”

The weakening yen may also be felt by companies operating outside Japan — like American and German automakers and South Korean gadget manufacturers, which compete head-to-head with Japanese corporations. Those companies may find themselves under pressure to squeeze profit margins to compete against suddenly flush Japanese competitors.

“Some of these Japanese companies were profitable at ¥78 to the dollar,” Mr. Strauss said, so the dollar at ¥100, or “parity,” will be a boon for the corporate sector.

“This will provide a reliquidification of the Japanese market,” he said.

It will take time for competitors to Japanese companies to feel the effects, Mr. Mayer said, but he cautioned there were larger concerns to consider: “By injecting such a large amount of money into the global financial system, you may end up distorting prices in such a way that it causes distortions in the real economy.”

Mr. Strauss said the biggest impact would be felt in Japan, where an investor could hold a 10-year government bond with a yield of less than four-tenths of a percent, or could take on a little more risk in stocks.

The lesson after the Japanese investment bubble collapsed in 1990 was “never own equities again,” he said, but the moment may have arrived where that no longer holds true — with a payoff for the country and markets overseas.

But Japanese investors are more cautious than those of a generation ago, he added.

“I don’t think they’re going to go out and buy Pebble Beach,” Mr. Strauss said, referring to the legendary golf course in California acquired by a Japanese business owner in 1990 at a wildly inflated price.

Article source: http://www.nytimes.com/2013/04/09/business/global/yen-slides-close-to-level-of-100-to-the-dollar.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,