Japan Recovery May Give Hatoyama Room to Tackle Debt

Bloomberg:

 Japan’s government, aiming to avert a collapse of confidence in its 882.9 trillion yen ($9.6 trillion) debt, may get a boost from a report tomorrow likely to show growth accelerated in the first quarter.

Japan, the Group of Seven economy that shrank the most during the crisis, benefited from rising exports that spurred production and helped deliver the first gain in wages in 22 months. Gross domestic product rose at a 5.5 percent annual rate from January to March, according to the median of 21 estimates in a Bloomberg survey before tomorrow’s release.

“The government can put more emphasis on fiscal discipline” with a strong GDP number, said Minoru Nogimori, an economist in Tokyo at Nomura Securities Co., a unit of Japan’s largest brokerage. “Given the Greek sovereign problem, fiscal rehabilitation is becoming more crucial.”

Prime Minister Yukio Hatoyama’s administration aims to unveil a strategy next month to contain the world’s largest public debt after the collapse in Greek securities forced a European Union bailout of almost $1 trillion. The budget plan may leave the burden on Japan’s central bank to help sustain the recovery as deflation persists, according to Nogimori.

Tomorrow’s report may show that the GDP deflator, a gauge of prices across the economy, fell 3 percent in the first three months of 2010 from a year before.

Deflation Legacy

The measure has only risen twice in the past 47 quarters going back to 1998. BOJ policy makers as a result will keep the benchmark interest rate at 0.1 percent at a two-day meeting that starts tomorrow, according to the median estimate in a separate survey.

Deflation worsened in the aftermath of a collapse in global trade that led Japan to shrink 5.2 percent in 2009, the most in the postwar era and more than the U.S.’s 2.4 percent and the euro area’s 4.1 percent drop, International Monetary Fund figures show.

The rebound has been driven by a revival of foreign demand, especially in China, that has fueled profits at exporters from Toyota Motor Corp. to Toshiba Corp. and begun to spur wages and jobs. Unadjusted for price changes, nominal GDP for the world’s second-largest economy probably advanced 1.3 percent, the most in 10 years, a median projection shows.

“It’s a good chance for the government to take action to improve the nation’s fiscal health and prevent a sudden rise in bond yields,” said Susumu Kato, chief economist at Credit Agricole CIB and CLSA in Tokyo.

Bond Sales

Moody’s Investors Service Senior Vice President Thomas Byrne said in Tokyo today that the government’s fiscal plan due next month must be “decisive” in order for the outlook on the country’s Aa2 debt rating to stay “stable.”

Finance Minister Naoto Kan this month proposed extending a pledge to keep annual bond sales around 44 trillion yen by a year, through March 2012. He said that raising taxes could boost the economy if used wisely, adding to signs the government may consider increasing a levy on sales.

A legacy of deflation, four recessions since 1990, and repeated fiscal stimulus packages is a gross debt level that exceeded twice the size of GDP last year, IMF calculations show. So far, that hasn’t caused a debt crisis given demand among Japan’s domestic investors, who hold more than 90 percent of government bonds.

Posted via email from Jim Nichols