What Japan Should Do to Revive Its Sagging Economy
Japan should act fast to bolster its flagging economy and respond not only with further monetary easing, but also an extra budget and intervention to cap the strength in the yen that is hurting exporters, economists say.
Data on Monday showed Japan’s economy grew 0.3 percent in the April-June period, much weaker than expectations for a rise of 0.6 percent and a sharp slowdown from growth of 1.3 percent seen in the previous quarter as consumer spending slowed and the debt crisis in Europe weighed on demand for Japanese goods.
“The Bank of Japan (BOJ) really needs to do more,” Mathew Circosta, Economist at Moody’s Analytics told CNBC Asia’s “Squawk Box”following the release of the GDP numbers.
“We think quantitative easing will continue in the second half of the year and that they (BOJ policy makers) will ramp up asset purchases to bring down interest rates,” Circosta said. “We also think they should intervene in the currency market, that’s a key policy which we haven’t seen since last year.”
The BOJ left it its monetary policy unchanged at a meeting last week but downgraded its view of exports and factory output, a sign that it was perhaps moving closer to easing monetary policy again. Central banks in the U.S., Europe and Chinaare all expected to ease monetary policy again in coming months to lift economic growth.
Japan’s central bank has eased monetary policy twice this year, in February and in April; both times via an increase in asset purchases.
The Japanese economy has held up relatively well this year as stimulus measures following last year’s earthquake and tsunami boosted domestic demand. Yet, Monday’s data show the impact of the stimulus is fading, while the European debt crisis and strong yen highlight the risks to growth going forward, analysts said.
The yen has gained about 6 percent against the dollar since March and concerns that the strong currency will derail the economic recovery has prompted officials to be increasingly vocal about the currency strength in recent weeks. A number of big exporters such as Sony and Nissan have blamed the firm yen for weighing on their earnings.“If you look at the export side, exporters are finding it very tough because of the currency position,” Peter Esho, Chief Market Analyst at City Index told CNBC’s “The Call.”
“I think we might be close to some commentary from the BOJ off the back of this economic data, so I would be looking to sell the yen over the next few days should it get to ridiculous levels,” he added.
The yen hardly budged after the weaker-than-expected GDP numbers, hovering around 78.26 per dollar.
Extra Budget?
Some economists said the weak GDP numbers increased the prospect of Japan passing an extra budget by the end of the year to stimulate the economy.
“Politically it is very important to have an economy that is doing well, so it is highly likely that we could get a supplementary budget put together before year-end,” said Masayuki Kichikawa, Chief Japan Economist at Merrill Lynch Japan Securities in Tokyo.
“A supplementary budget could add about 0.5 percentage points to Japan’s GDP. There will also be more pressure on the BOJ to ease monetary policy,” he said.
Japan passed three sets of supplementary budgets last year totaling some 18 trillion yen ($230 billion) and the Japanese parliament approved a fourth budget earlier this year for 2.5 trillion yen ($32.9 billion) to fund reconstruction projects and support the economy.
“The government does have money it can use for a supplementary budget without increasing bond issuance – we think it can use a supplementary budget of up to 2 trillion yen,” Kichikawa added.
- By Dhara Ranasinghe