Here we go again with the umpteenth economic stimulation package aimed at straightening out Japan’s problems. After years and years of attempts to get the thing moving, it looks like we are now set to return to the era of deflation and under-performance.
The announcement by the creaking Hatoyama coalition cabinet that it has agreed to raise over 7 trillion yen in a second supplementary budget coincides with news that tax revenue continues to drop. The gigantic size of government debt plus the reported dip in economic sentiment suggests that Japan is in for another rough spell.
Yet all the present doom and gloom commentary fails to explain away what can be seen as good news. While the nation’s problems are apparent in its limited growth, yawning budgetary deficits, the prospect of deflation looming once more on the horizon and a general concern over where we might go next, there is another almost overlooked side to the equation.
The other bit is that Japan’s trade balance is adequate, its current-account surplus is huge and the massive strength of the yen suggests that outsiders take a rather more positive view of the economy than folks in Tokyo. Of course, the rise in its currency is mighty unpleasant for hard-pressed exporters but it can surely be interpreted as a perverse vote of confidence in Japan and its future.
We need reminding, too, that domestic investors are playing it safe as usual and that the swelling government debt is still being financed by remarkably low-paying bond purchases. No other central bank among the leading G-8 nations can boast of its ability to borrow at such remarkably slim rates. Even ever-cautious Germany sees its government bond rates at almost exactly twice those of Japan, while British interest rates on its national debt come in at approximately three times Japan’s and those of Ireland and Greece within the Euroland corset are far higher still.
The willingness of Japanese institutions and individuals to keep buying bonds suggests that things are under reasonable control for the present. Of course, this could change and the ability or otherwise of the Hatoyama government to sort out its public finances must necessarily impinge on future rates but Japan’s credit rating is unlikely to be challenged.
With growth rates being revised downwards and corporations still unwilling to undertake major investment programs in the wake of weak consumer demand, the pessimists are having a field day. For now, though, it might be safer to assume that Japan’s position has hidden strengths and that it comes out pretty well when comparisons are being made with other major economies.
Ask yourself ,for example, whether Hatoyama or Britain’s Gordon Brown has more sleepless nights over the state of their economies and the answer can hardly in doubt. Hatoyama has loads of problems over keeping his coalition partners on board and has yet to solve the Okinawa U.S. base issue, but the underlying resilience of the economy should not be overlooked. The chances are that Japan will sail on while others face shark-infested seas.