Commentary by William Pesek
April 10 (Bloomberg) -- Japanese are getting more than their money’s worth from Taro Aso’s recent visit to London.
Trips by prime ministers to meetings like last week’s Group of 20 one are normally complete junkets. There’s rarely much to show for all those government bureaucrats flying business class, staying at five-star hotels and soaking up the local culture.
It seems Aso got a bit of religion from his chats in London with U.S. President Barack Obama, U.K. Prime Minister Gordon Brown and 17 other leaders. Aso’s new stimulus package, amounting to 15.4 trillion yen ($153 billion), is proof enough of that.
Two key points are worth noting here. One, Japan will now spend a total of 25 trillion yen, so it’s finally getting serious about taming the recession. Not serious enough, yet this is notable progress. Two, Asia’s spending efforts are putting an even greater onus on European nations reluctant to do more.
To economists such as Glenn Maguire of Societe Generale SA in Hong Kong, this is a “do-or-die” moment for the world’s second-biggest economy. Japan has been among the hardest-hit developed nations because of a heavy reliance on exports. Aso’s two previous packages failed to excite markets or consumers. This one may do just that.
Good Start
“I’m not convinced it is enough, but it is a big package and a good start,” says Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo.
The important word here is “start.” Last year’s popular argument that Japan was a haven from global turmoil died a quick death. The ruling Liberal Democratic Party’s latest package amounts to about 3 percent of gross domestic product. Put together with Aso’s previous two, Japan will be spending about 5 percent of GDP -- a ratio comparable to U.S. stimulus plans.
Rather than spreading out the spending over three years, as with previous plans, Japan’s latest will occur in one year. If implemented competently, these steps could stabilize the domestic economy and stop the bleeding in labor markets. Recent data showed business sentiment plunged to a record low and suggested unemployment will rise markedly.
Japan’s bond vigilantes aren’t happy, of course. Yields surged to their highest level since November as traders brace for as much as 11 trillion yen of bonds to fund the spending. Japan is doing the right thing, though. Its already poor fiscal position will worsen, yet that’s more tolerable in the short-to- medium term than another extended bout of deflation.
More Needed
More spending will be needed. At the end of April, more than 2,000 Japanese companies will begin to report earnings for the 12 months through March 31 and provide targets for the current year. The state of the global economy, coupled with a strong yen during the past year, will make for sober reading.
The question is how much more spending Japan will need. The amount could be considerable thanks to the liquidity trap in which the Bank of Japan finds itself. Jerram, for example, says the BOJ would need to get its 0.1 percent benchmark rate into the minus 4 percent to minus 5 percent range to stabilize growth. In a credit crisis, fiscal policy must lead the charge.
It’s quite a contrast with Europe. In London, German Chancellor Angela Merkel was pressured to spend more to attack the country’s worst recession in more than 60 years. Finance Minister Peer Steinbrueck argues Germany doesn’t need a third stimulus package after spending 82 billion euros ($110 billion) in the previous two rounds. France and other European economies haven’t spent as much as many economists would like.
Cutting Rates
The European Central Bank, meanwhile, is already looking ahead to inflation pressures that may coincide with a global recovery. Last week, it cut its benchmark interest rate to a record low of 1.25 percent.
It’s an open question whether the ECB is too hawkish as global growth slows -- just as it’s unclear whether the Federal Reserve has cut rates too much. As 2009 unfolds, Europe may have a difficult time resisting more drastic action.
Asian economies have dropped their resistance. China’s 4 trillion yuan ($585 billion) stimulus package is an example.
Granted, it’s easier for the U.S., Japan or developing Asia to boost spending. Many in Europe are subject to the Growth and Stability Pact, which calls for budget deficits to be within the limit of 3 percent of GDP. If global growth gets worse, though, Europe may have little choice but to loosen fiscal policy along with the U.S. and Asia.
Markets responded well to reports of Japan’s package. The Nikkei 225 Stock Average’s erased its loss on the year, rising 2.5 percent this week. The index is up 1.18 percent on the year after reaching a 26-year low on March 10.
Sustaining that optimism will require even bigger government steps. How many and how much is impossible to say. What we can conclude is that Japan’s leaders are finally realizing the depth of the economy’s challenges, and that’s good news for Asia.
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