FROM THE EDITOR

CONFIDENCE DEFICIT On April 1 the Bank of Japan released its March tankan survey of short-term business sentiment. The results of the quarterly survey were sobering. The diffusion index of sentiment regarding current business conditions at major manufacturers (an index calculated as the difference between the percentage calling conditions favorable and the percentage calling them unfavorable) was minus 58, down 34 points from the –24 reading in the previous survey (December 2008). This was the lowest such figure on record since the current set of statistics was started in May 1974, below even the –57 recorded in May 1975, when the Japanese economy was reeling from the effects of the first oil crisis. Furthermore, the diffusion index was negative for the major manufacturers in all 15 of the industrial categories tracked by the BOJ. The figure for the automobile industry, which depends heavily on exports, was an abysmal –92, and new record lows were reported for the industrial machinery and electrical machinery industries as well. On a brighter note, though, the decline in production shows signs of ending, particularly in the auto industry, reflecting rapid progress in the trimming of inventories. The diffusion index of forecasts for conditions three months ahead actually improved for the first time in three years (from –58 to –51), and some market participants have begun to take the view that the worst of the downturn is behind us.

The March tankan also revealed expectations of sharp declines in corporate profits. Large manufacturers were estimating a 6.5% decline in their sales for fiscal 2009 (April 2009 through March 2010) and anticipating a 19.7% drop in current profits from their fiscal 2008 levels. The March survey was the first to reveal negative figures for these two measures of expected performance in the year ahead. In addition, the large manufacturing firms’ planned levels of fixed investment in fiscal 2009 were down 13.2% from fiscal 2008. This is the biggest margin of decline ever reported in a March tankan survey. Another negative sign was seen in their assessments of production capacity. The diffusion index of "excessive capacity" minus "insufficient capacity" readings at the major manufacturers rose to 39, the highest (worst) figure since February 1978. Meanwhile, the diffusion index for employment conditions (readings of staffing levels as excessive or insufficient) rose to 35 among major manufacturers, the highest figure since March 2002; this indicator of surplus staffing rose 27 points from the December 2008 figure, the biggest margin of increase ever seen.

Yet another indicator of tough conditions was seen in enterprises’ (all industries) readings of their cash flow. The diffusion index of "easy" minus "tight" in large firms’ assessments of their financial state was down 11 points at –4, the first negative figure since March 1999.

GOVERNMENT TO THE RESCUE?

The National Diet enacted the government’s budget for fiscal 2009 on March 27. The general account was a record-high ¥88.5 trillion, and so was the ¥51.7 trillion figure for general expenditures (policy-based spending). At a press conference the same day, Finance Minister Yosano Kaoru called on all the ministries and agencies to implement the budget "smoothly," asking them to front-load their spending as much as possible so as to stimulate the economy. Regarding the ¥1 trillion in contingency funding for "emergency economic responses," Yosano declared that he would be happy if ¥1 trillion turned out to be sufficient to deal with the economic downturn, revealing his opinion that large-scale fiscal stimulus would inevitably be required to cope with the current situation.

On April 9 Prime Minister Asô Tarô delivered a speech at the Japan National Press Club concerning Japan’s future development strategy and an initiative to double the size of Asia’s economy by 2020. The prime minister identified three pillars for Japan’s growth: (1) leading the world in the low-carbon emission revolution, (2) a healthy, long-lived society in which people feel secure and strong, and (3) promoting the attractiveness of Japan. He outlined plans aimed at increasing Japan’s gross domestic product by ¥120 trillion and creating 4 million new jobs by 2020, including such targets as a 20-fold increase in the scale of solar power, improvements in conditions for nursing-care workers to increase their number from the present 1.3 million to 2.2 million, and an increase in the number of foreign visitors to Japan to 20 million a year, more than double the current figure. Noting the key linkage between economic growth in Asia and growth within Japan, Asô called for the formulation of a "comprehensive Asian development plan" and announced plans for Japan to support infrastructure development in other Asian countries.

The following day the government and ruling coalition agreed on a set of additional economic stimulus measures. These are to involve projects amounting to ¥56.8 trillion, of which ¥15.4 trillion is to be in the form of new fiscal outlays, a sum equivalent to about 3% of gross national product. If adopted, it will be Japan’s biggest such stimulus package ever, and its scale is even bigger than the 2% of GDP that the United States proposed as a guideline target for national pump-priming efforts at the Group of 20 summit in London on April 2. The package includes measures for employment (such as livelihood support payments for those undergoing vocational training and housing allowances for the unemployed), the environment (such as subsidies for those purchasing energy-saving consumer electronics and fuel-efficient automobiles, along with measures to promote the spread of solar power), and public works (notably a runway extension project at Tokyo’s Haneda Airport and urgent work to improve the loop roads around Japan’s three major metropolises), along with a cut in the gift tax, a one-year-only special allowance of ¥36,000 to families for each child aged 3–5, expansion of government guarantees for lending to small businesses, and increased revenue-sharing grants to local governments.

According to newspaper reports, the drafting of these measures started with adoption of a target for the overall size of the package. According to an estimate released by the Cabinet Office on March 17, the demand-supply gap in the Japanese economy reached –4.1% in October– December 2008, meaning an annualized demand shortage on the order of ¥20 trillion. This led to the emergence of a view within the government that the stimulus package needed to be in double-digit trillions. Ruling coalition legislators then reportedly joined forces with bureaucratic organs and business interests in a scramble for appropriations to shore up their support bases. In this way the members of the farm lobby, for example, were able to secure a total of ¥1 trillion in new spending for agriculture, including measures to promote larger-scale farming, and the New Kômeitô, the junior partner of the Liberal Democratic Party in the ruling coalition, secured the provision for supplementary allowances of ¥36,000 per child to support families raising small children. Aside from such politically motivated spending, the package’s ¥15 trillion includes some ¥6 trillion in appropriations for growth strategies, such as spending in the environmental field. The downside is that all this spending will further worsen the state of public finances, leading to an anticipated national and local deficit of more than ¥20 trillion in the primary balance for fiscal 2009. It will obviously be necessary to undertake an overhaul of the tax system to increase revenues over the medium term.

HELPING HANDS FOR PAKISTAN

On April 17 the Japanese government and the World Bank jointly sponsored a multilateral gathering on assistance to Pakistan in Tokyo. This Pakistan Donors Conference was attended by representatives of 31 countries and 18 international organizations and agencies. Pakistan’s development partners pledged more than $5 billion in new financing over the next two years, and Prime Minister Asô indicated Japan’s readiness to contribute up to $1 billion over the same period. In an address to the conference, Asô noted, "Pakistan has played a vitally important role in efforts of the international community to counter terrorism and extremism," and he also remarked on the importance of support from a regional perspective, declaring, "Without the stability of Pakistan, there can be no stable Afghanistan." (Shiraishi Takashi)

© 2009 Japan Echo Inc.