FocusJapan politics may hamper implementation of $154bn stimulus

14 April 2009 07:12  [Source: ICIS news]

By Pearl Bantillo

SINGAPORE (ICIS news)--Japan’s record fiscal stimulus package, crucial to ease the country’s heavy economic burden, may be delayed by political wrangling, analysts said on Tuesday.

Prime Minister Taro Aso revealed last week a new Y15,400 billion ($154bn) economic package that includes subsidies and tax incentives that should boost consumption as Japan was severely hit by the sharp downturn in external demand.

Without the stimulus that was equivalent to 3% of the country's GDP, economists expect Japan to contract by as much as 6% this year and its various industries like petrochemicals and automotives will continue to suffer.

“There is uncertainty over the enactment of the fiscal 2009 supplemental budget, which would finance this stimulus package because of the political climate,” said Akira Maekawa, a Tokyo-based economist at Swiss brokerage UBS Research.

“Politics is something of a drag over there. Everything proceeds slowly. I don’t think everyone will be particularly surprised over (potential) delays,” said David Cohen, Singapore-based chief economist at research firm Action Economics.

The supplemental budget bill is expected to be sent to the Diet on 27 April.

While the Lower House controlled by Aso’s Liberal Democratic Party can easily approve the bill, the legislation may be stalled at the Upper House, where the opposition – the Democratic Party of Japan has bigger clout, UBS’ Maekawa said.

Under Japan’s legislative process for budget-related bills, the supplemental budget will need to wait 60 days in the Upper House. In the event that the group has not deliberated on the bill, the Lower House can revote the bill.

“The problem is the current Diet session will be over on 3 June. The budget bill and the budget-related bill might have to extend the current Diet session. And still, there is uncertainty when Aso decides to go for the elections,” Maekawa said.

In various media accounts, Aso was reported as saying that the schedule of the general elections will depend on the DPJ’s reception of the supplemental budget.

This move could be detrimental to the plan because it might precipitate a change in government leadership.

“The future is very, very unclear. The LDP might lose, then everything – all these might disappear,” said Maekawa.

But analysts were circumspect about the immediate economic benefits of the package as the recovery of global demand is deemed more vital for Japan’s well-being than any other fiscal measures, analysts said.

UBS expects the new stimulus package to boost Japan’s GDP by 1.5-2.2 percentage points for the fiscal year ending March 2010 although it would just ease and not completely avert the expected sharp decline in economic output.

Maekawa said he has not changed his forecast of a 4.3% year-on-year decline in Japan’s GDP for the current fiscal year given the uncertainties in the implementation of the new economic stimulus.

 “It should be helpful on the margin for Japan’s recovery. But I think that depends more on trade turning around,” said Action Economics' Cohen.

Cohen, on the other hand, expects Japan to post a 3.0% decline in GDP after taking into account the $154bn package.

“The domestic demand situation has been very fragile. Without the boost from external demand, it’s going to take a longer time for the Japanese economy to go back to potential growth of above 1%,” said UBS’ Maekawa.

This may not happen until the first quarter of calendar year 2011, he said.

($1 = Y100.09)

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By: Pearl Bantillo
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