Finance counsels

Japanese Prime Minister Taro Aso’s record stimulus plan will only provide temporary relief as the country heads for its worst postwar recession, economists said.

Morgan Stanley, Nikko Citigroup Ltd. and Macquarie Securities Ltd. said the economy will shrink less than predicted in the year ending March 2010 after Aso last week unveiled his 15.4 trillion yen ($155 billion) package.

The plan, which focus on jobs, green technology and health care, brings total stimulus since Aso took office in September to 25 trillion yen, or more than 5 percent of gross domestic product. Should global demand fail to pick up, the government may be forced to spend even more to sustain a recovery.

“The revision in our forecasts stems from the scale of measures Japan is taking to shore up the economy, as these have burgeoned beyond our expectations,” Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo, wrote in a report. “But domestic factors alone cannot turn this into sustainable growth. Global economic revival through financial-system reforms is essential.”

There are signs the worst may be over for the world economy. Chinese industrial production and urban fixed-asset investment accelerated in March, indicating the 6.1 percent expansion in the first quarter probably marked a low point for the world’s third-biggest economy.

Confidence in the global economy rose to an 11-month high, a Bloomberg survey of users on six continents showed yesterday.

Biggest Decline

The world’s second-largest economy will shrink 3.3 percent in the year ending March 31, 2010, less than the 4.3 percent contraction predicted earlier, Sato said. That would still be the biggest decline in the postwar era.

Sato cut his GDP forecast for next year to a 0.5 percent contraction from a previous projection for 0.3 percent growth.

Nikko Citigroup Ltd. followed a similar pattern on April 14, raising its GDP estimate for the current fiscal year to a 4.7 percent contraction from a 5.5 percent drop, while cutting its 2010 forecast to 0.2 percent growth from 0.7 percent.

“If the government fails to release additional stimulus measures in 2010, public works spending will decline at a rapid pace and that will exercise strong downward pressure on GDP in the next fiscal year,” said Kiichi Murashima, chief economist at Nikko Citi cash loans till payday.

Nomura Securities Co. also said the boost to the economy was likely to be temporary when it raised its GDP estimate to a 2.8 percent contraction from a 4.3 percent drop.

No ‘Major Rejoicing’

Richard Jerram, chief Japan economist at Macquarie Securities, said Aso’s plan to bolster job security may persuade households to save less, though it won’t be enough to make up for a drop in demand that will cause prices to fall.

“This is not a cause for major rejoicing,” said Jerram, who predicted GDP will shrink 3.6 percent this fiscal year, less than 4 percent previously estimated. “We still expect deflation to continue for the next two to three years.”

Aso’s package includes 1.9 trillion yen to create jobs and support temporary and part-time workers, who have been hardest hit by Japan’s recession. Money will also be spent to provide funds to companies, promote low-carbon technology and temporarily reduce gift taxes for people purchasing homes.

“This is a decisive step,” said Jesper Koll, chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. “A cut in inheritance tax is a very, very worthwhile step, speeding up the transfer of wealth from the older generation to the younger generation, enticing the younger generation to step up to the plate and take up that mortgage to buy a home.”

Export Collapse

A collapse in exports caused Japan’s economy to shrink at an annual 12.1 percent pace in the fourth quarter of 2008, the sharpest decline since the 1974 oil crisis.

Jerram said Japan may have suffered “another huge decline in GDP” in the first three months of 2009 before rebounding in the current quarter. He said the economy may grow 1.7 percent in the year starting April 2010, more than 1.3 percent earlier predicted.

“The later part of the year and fiscal 2010 will be dependent on the impact from fiscal policy, both at home and abroad,” he said.

Source

Filed under: finance by Guru