This document is based on information available as of February 16th, 1999.
bmo.com
Japan's economy is still where it has been for the last four quarters –
in recession. It continues to be dogged by a sick financial system,
weak East Asian demand and currencies, and depressed consumer
and business confidence.
Fortunately, Japan's government and central bank have adopted
several measures to get the economy back on its feet. Given that the
economy is generally believed to have fallen into a liquidity trap, where
low interest rates no longer provide a boost to demand, the
government has embarked on a large-scale fiscal stimulus program. In
fact, parliament is expected to pass its latest stimulus effort, the ¥24
trillion fiscal year 1999 budget, this week.
The Japanese government has also undertaken steps to help relieve
the financial sector of its bad-debt burden, which should gradually
alleviate the credit crunch. Progress has been made on this front. The
Financial Reconstruction Committee has given informal approval for a
¥7.5 trillion injection of government funds to 15 of the largest banks. In
order to qualify for these injections, the banks have had to restructure
their businesses, which bodes well for the future.
Unfortunately, however, the huge expected increases in borrowing
needed to fund the government's efforts are also threatening to hurt the
economy. Debt supply concerns have pushed up long-term interest
rates to attract private sector savings. In turn, this has led to a
strengthening in the yen as the higher yields encourage repatriation of
funds. In other words, it looks as if public spending could crowd out
private sector spending.
What should be done? The rise in both the yen and long-term interest
rates suggest that additional monetary stimulus is needed. The Bank
of Japan has made a move in this direction by trimming the overnight
call rate to 0.15% from 0.25%. It has also said that it will guide the
rate lower and that it will inject more liquidity into the system.
Given that the Japanese economy is still in recession and consumer
prices are falling, we believe the Bank of Japan will adopt a more
aggressive approach to stimulating the economy by purchasing JGBs,
most likely in the secondary market. Such action should lead to both
a weaker yen and lower long-term rates. We are forecasting the yen to
depreciate to 138/US$ by the first quarter of 2000, abetted by an
expected tightening in US monetary policy.
We expect the combination of fiscal spending, banking-sector reform
and monetary stimulus to pull the economy out of recession early this
year and stave off a deflationary spiral. In the short run, the main
source of strength will be public investment spending, as the private
sector continues to cut production, employment and inventories. After
an expected 2.9% fall in 1998, GDP is forecast to decline 0.2% in
1999 before rising 0.9% in 2000.
However, the risks to the Japanese outlook remain on the downside,
particularly over the medium term. Failure to restore health to the
financial sector and restructure the economy would likely cause
activity to fall again once the fiscal stimulus wears off.
>>>Another report on the same site expects inflation to pick up in
>>>the U.S. as governments try to reflate economies, with the Fed
>>>possibly raising rates twice. |
