9 November 2001, 09:06 AFX-ASIA: ROUNDUP - Japan cuts FY GDP target; lower tax income to hit fiscal reforms
The Cabinet Office cut its year to March real
GDP forecast to a 0.9 pct contraction, in line with expectations and
earlier leaks in the domestic press, with little market reaction to the
news, analysts said.
However, some noted that the numbers, though unsurprising,
re-emphasised that the government's commitment to fiscal propriety will
be severely tested by the reduction in tax revenues suggested in the
report.
Significant here was the Cabinet's downgrade of the nominal GDP
estimate to a 2.3 pct decline from its previous forecast of a 1.0 pct
rise.
Government officials this morning reaffirmed the commitment to
keeping new bond issuance below 30 trln yen in the current and next
fiscal years, while simultaneously keeping open the possibility of
ditching the policy later.
Finance Minister Masajuro Shiokawa said the economy is not yet in a
"catastrophic situation", adding that the government still plans to
hold to its cap on issuing new bonds.
"I often say that we will not stick to the 30 trln yen bond limit
at any cost. If a critical event emerges, or forceful measures that
ensure economic recovery become available, we will spend more to
finance this," Shiokawa said.
"However, that doesn't mean the government will rely on new
issuance of bonds. We need to find other sources of finance," he said.
"We will write the next fiscal year's budget, keeping to the 30 trln
yen bond limit."
State Minister for Economic and Fiscal Policy Heizo Takenaka said
he does not think the government needs to compile a second
supplementary budget to boost demand, even as the first such stimulus
package enters parliament.
"I don't think it is necessary for now because Japan is not yet
falling into a deflationary spiral," he said.
However, some observers noted that officials are unlikely to admit
to a further tranche of spending that would make the revenue
calculations supporting the first supplementary budget redundant before
it passes through parliament.
"They are saying the economy is going to shrink and 'that's it;
we're not going to do anything'," ING Baring chief economist Richard
Jerram said.
"The main issue is figuring out how they are going to wriggle out
of the bond cap," he said. "In the end, it's dead, one way or another."
JP Morgan chief economist Masaaki Kanno agreed that the numbers
were uninteresting in themselves but also noted the implications for
fiscal policy.
"It's in line with, first, the leak from government sources, and
very close to the BoJ official view, so it's not surprising at all,"
Kanno said.
"The reason why it was disclosed today is the government submitted
the supplementary budget to the Diet (parliament)," he said, adding:
"The (budget) bill assumed a downward revision for tax revenues."
However, Kanno believes the government's estimate of around a 2 pct
decline in revenue is much too conservative, saying: "Tax revenue
should be down some 3.5 pct... so it still seems very high."
Ultimately then, Prime Minister Junichiro Koizumi's attempt at
fiscal rectitude must either be abandoned or the government will have
to make deep cuts in spending to meet the 30 trln yen bond target.
"This has big implications for next year. Next year the nominal
growth will likely be down 2-3 pct (in line with this year's revised
forecast) so tax revenue will be down too," Kanno said.
"If Koizumi wants to keep to the 30 trln yen, they have to cut
spending by the same amount (of decline in revenue), which is very
contractionary ... and very bad given the economic conditions for Japan
and the world," he said.
Kanno said the revised GDP components were of only academic
interest, noting though that the worsening of Japan's trade terms
reflect an ongoing "hollowing out" of industry that could offer
worrying implications for the world.
"Imports have remained firm, reflecting the increase of imports
from China and other Asian countries, (in turn) reflecting the
hollowing-out effect and tak ing advantage of wage differentials," he
said.
"The dominance of production of China is likely to have a large
impact on Japan ... and probably in the rest of the world ... as
China's share of the world market expands," he added.
Others simply reiterated the unsurprising nature of the GDP
figures.
"The numbers are simply catching up with reality. I don't think
there's anything significant or surprising in them," HSBC senior
economist Peter Morgan said, adding they follow an already negative
forecast by the Bank of Japan.
The foreign exchange and equity markets largely ignored the data.
"It's fine that they lower the forecast. But the announcement did
not come with any policies aimed at propping up the economy and pushing
structural reforms," said Kazunori Jinnai, general manager of equities
at Daiwa SMBC.
"Market participants were disappointed by the lack of new economic
measures. They are losing their confidence in the current
administration," he said.
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