Japan govt, BOJ clash over risk of return to recession

Fri, Nov 6 02:08 PM

Enlarge Photo A job seeker walks past consultation booths at Hello Work, Japan's biggest government job placement...

Japan's government dismissed the central bank's view that there was little chance of the economy slipping back into recession, saying instead that Tokyo will need to stimulate the economy next year to prevent such a dip.

National Strategy Minister Naoto Kan's clash with Bank of Japan Deputy Governor Hirohide Yamaguchi in parliament shows how tough it will be for the government and the BOJ to reach a consensus on managing the economy as doubts grow over the Democratic Party-led administration's ability to reign in spending.

"The BOJ has said the chance of the economy experiencing a double-dip is small. But we feel there is a strong risk of a double-dip," Kan told lawmakers.

The central bank has come under pressure from some cabinet ministers who worry that a quick exit from emergency steps to support corporate funding would hurt the fragile economy, just now emerging from its deepest recession in 60 years.

The government aims to offset the negative impact of freezing part of an extra budget compiled by the previous administration by taking steps to help create jobs, Kan said earlier on Friday.

The government faces a difficult balancing act to rejig a budget created by the ousted Liberal Democratic Party and compile one for 2010/11 that will free up funds for its programmes without harming the fragile recovery and causing bond issuance to spiral out of control.

"We decided to freeze 2.9 trillion yen, but only around 900 billion yen of that spending was allocated for the current fiscal year," Kan, who is also deputy prime minister, told reporters after a cabinet meeting.

"The measures for the labour market that we are considering now are likely to cancel out the negative impact."

Kan said freezing 2.9 trillion yen ($32 billion) in spending from the extra budget could lower gross domestic product by 0.2 percentage point in the year to March 2010.

He added that the government's plan to compile emergency employment measures could create around 100,000 new jobs, which could offset the negative effect on GDP.

Kan has said the jobs scheme won't require new funding as the government can use existing programmes.

But he is also calling for the Democrats to pull together yet another extra budget, likely to be submitted to parliament next year, that will include measures for the environment.

The government hasn't decided exactly what will go into that budget and how they'll pay for it.

Investors have already concluded that extra bond issuance is all but avoidable. Demand was weak at an auction of 10-year government debt on Thursday, and the yields on the notes hit a three-month high of 1.455 percent on Friday.

"If 10-year yields hit 1.5 percent, that would be an attractive level for life insurers to buy, so it is possible for long-term yields to pull back later this month," said Tetsu Aikawa, deputy general manager of the capital markets division at Shinsei Bank.

"Still, concerns about extra bond issuance and the government's spending plans aren't likely to fade anytime soon."

The two- to 10-year yield spread stood at 118 basis points on Friday, nearing a three-year high of 118.5 basis points touched in June, on concern Prime Minister Yukio Hatoyama's cabinet is losing its grip on fiscal discipline.

Administrative Reform Minister Yoshito Sengoku is trying to pare down budget requests for 2010/11 after they swelled to a record 95 trillion yen.

Finance Minister Hirohisa Fujii has said the government will need to issue more bonds for the fiscal year to next March to cover a tax revenue shortfall. Analysts say that means debt issuance may hit a record above 50 trillion yen.

Japan can ill afford to further strain public finances, which are shaping up as the worst among the developed countries.

The International Monetary Fund predicts Japan's total public debt could reach 218 percent of its gross domestic product in 2009 and 227 percent in 2010, beating by far the 84 percent and 93 percent projected for the United States.

For a graphic showing the fiscal pressure on Japan, click: http://r.reuters.com/bad88d

Voters swept the Democrats to power in a national election in August as the party promised to cut what it considers wasteful spending, wrest control of the budget process from bureaucrats and increase spending on measures to support households.

(Editing by Hugh Lawson)

(For more news on Reuters Money visit http://www.reutersmoney.in)

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