Japan Brief / FPCJ, No. 0865

October 30, 2008

Japan Moves to Shore up Domestic Economy and Arrest Share Price Declines

The Japanese government laid out on October 30 a fresh stimulus package, worth 5 trillion yen in budgetary appropriations and 27 trillion yen in economic effect, to cope with a looming recession of the domestic economy in the midst of worldwide economic downturn. The package announced by Prime Minister Taro Aso also included measures to stem further stock price declines and reinforce financial institutions’ capital bases which could be undermined by a deepening recession.

“A once-in-100 years financial storm is raging over the world, and its fallout is certain to rock Japan’s stock market and broader economy, although this country is relatively stable and its foundation solid,” Aso told a news conference. He declared that “security of people’s lives and financial stability come out as two matters of top priority in domestic measures.”

The centerpiece of the stimulus package is the provision of fixed-sum benefits to all households in cash or in the form of vouchers, totaling 2 trillion yen. A family of four will receive about 60,000 yen. The benefit is meant to stimulate personal consumption. Another pillar is a ‘largest-ever’ tax break on mortgage loans, up to 6 million yen in tax credit. It also envisages assistance for smaller enterprises in public credit guarantee. Measures for the stabilization of financial institutions and the stock market include hightened readiness for injection of public funds into banks and purchase of stockholdings on banks’ portfolios. Most of these measures are subject to parliamentary approval through a supplementary budget bill and other legislation.

Earlier in the week, the government scrambled to prepare measures to arrest a decline in share prices of alarming proportions which took place on Monday, October 27, bringing the benchmark Nikkei 225 index to a 26-year low at 7,141.27. These measures formed part of the stimulus package.

Helped also by a strong rebound on the New York stock market on October 27, the Nikkei rallied on October 28, closing the day 459 points higher from the previous day. That was followed by two consecutive days of steep upsurge, almost 590 and 818 points, respectively, on October 29 and 30. During the three days, the Nikkei shot up a total of 1,967.86 points to 9,029.76.

The rally appeared to have been prompted by a rumor of buying by the public pension fund and the ban on short selling. An apparent halt to the yen’s precipitous appreciation was also an important factor. Anticipation of concerted interest rate cuts by central banks, including the U.S. Federal Reserve and the Bank of Japan, added to the buoyant sentiment on the market on October 30. (The U.S. Federal Reserve cut its benchmark rate by half a percentage point to 1.0% on October 29.)

The Japanese stock market was battered as an unexpectedly rapid advance of the yen’s value against the dollar and the euro hit major exporters like Sony and Toyota, which were key players in the economic recovery over the years in the absence of weak home demand. The Japanese currency’s steep rise was caused by the flight of the world’s money to a haven of relative safety and the unwinding of the so-called yen carry trade. A sharply higher yen added to the increasingly bleak outlook of the Japanese economy.

One dangerous fallout of the plunging stock prices has been a rapid shrinkage of the value of major banks’ portfolio of assets, a major proportion of which is held in stocks. This suddenly raised concern about the stability of Japanese banks, which had been viewed as relatively insulated from the crisis engulfing banks in the United States and Europe. In addition, smaller regional banks are reported to be suffering from rising bad loans as an increasing number of smaller firms who are their borrowers are going bankrupt in the widening recession.

The government intends to have 10 trillion yen ready for injection, if necessary, into banks whose capital base is eroded. It will also mobilize the Banks’ Shareholdings Purchase Corp., which was created in 2002 when share prices were at post-bubble lows, to resume purchases of bank shareholdings. The three megabanks unveiled their plan to recapitalize themselves by issuing new shares to the tune of up to 1 trillion yen, as is the case of Mitsubishi UFJ Financial Group.

Media commentaries
Editorials of major newspapers (all dated October 31) were critical of the fixed-sum benefit, questioning its usefulness to shore up the economy, and called it a vote-getting gimmick. They argued that what really is needed to reassure people is a more articulate longer-term blueprint for the nation’s economy and policies.

【Make decision (on calling general elections) to overcome the crisis】 (Asahi Shimbun)
“The fixed-sum benefit, whose effect to boost business is questionable, cannot but be called unabashed handout for vote grabbing.” “What is needed is to lay out bold policies to expand domestic demand based on a long-term vision and build a system to implement them. That is Japan’s role in the world economy and a means to win the competition with Americans and Europeans. It could force pain on people, and that’s why a government with strong leadership is essential.”

【Additional economic package: This is an ultimate handout】(Mainichi Shimbun)
“Stimulus measures could temporarily worsen the fiscal situation. In such a case, however, policies must be ones that convince people that the economy will recover. Policies whose effect is vague only work to swell the budget deficit. What Japan needs now is to build a social security system that reassures people and to reinvigorate households and smaller businesses that constitute the foundation of the economy. Populism and handouts with strong political orientation will fail to strengthen the economic society.”

【Parties on both sides of the aisle must join forces for early implementation of additional economic package】 (The Nikkei)
“That the prime minister has come up with an additional economic package flexibly responding to the worsening economic and financial situation merits credit. But the package this time around is a mixture of essential needs and proposals whose effect is questionable viewed against the fiscal costs they demand. In the midst of the escalating global financial crisis, the most important requirement is to prevent the spread of credit contraction in Japan.”

【Additional economic package: Go all out to stabilize markets】(Sankei Shimbun)
“The Aso government at least must quickly work out a mid-range tax reform program that includes a consumption tax hike to secure resources for social security services and legislate its implementation. That will give reassurance to people and prove to be a most effective economic package over the longer term. Also important are market stabilization measures. Since the eruption of the U.S. financial crisis, 100 trillion yen has been wiped away from the market value on the Tokyo Stock Exchange’s first section. This represents an enormous reverse asset effect, but that’s not all. If falling stock prices damage financial institutions, the Japanese economy, which is the healthiest among the advanced nations, will not be able to sustain itself.”

【Aso faces tough battle with choices he made】（Yomiuri Shimbun）
“It is reasonable that Aso unveiled at Thursday's press conference a large additional economic stimulus package to stop the economy from stalling.”“In order to overcome the current turmoil in the Japanese economy, which Aso previously described as ‘requiring three years for full recovery,’ and to carry out such responsible policies as those he announced in the press conference, we need a stable political framework. The prime minister should call an election as early as possible to seek a voter mandate.”

(Copyright 2008 Foreign Press Center / Japan)