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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (20766)	10/26/2004 7:52:41 PM
From: russwinter	Read Replies (1) \| Respond to of 110194

Japan: Spending the 'Surplus' Stratfor Summary Japanese officials say plans to rebuild after the October typhoon and earthquake will not involve a supplementary budget or efforts to stimulate the broader economy. Considering that Japan normally uses supplementary budgets to build infrastructure to boost the economy, Stratfor was at first skeptical. However, although there is certainly some creative fact-twisting going on, this time around we are willing to take Tokyo at its word. Analysis On Oct. 26, Japanese Prime Minister Junichiro Koizumi toured the damage inflicted upon his country by recent typhoons and earthquakes, and pledged rapid government action for reconstruction. Nine strong earthquakes and a typhoon that traveled the length of the entire island chain killed more than 100 people and inflicted damage so extensive that even a preliminary damage report has yet to be completed. The jaded, among whom Stratfor has been lumped, would be justified in sensing a new Japanese economic stimulus plan -- backed by more borrowing to fund it. Since 1990, Japan has lurched from one recession to another, and only the liberal use of deficit spending has kept the economy growing at all. This time, however, the Japanese reconstruction effort will rely on what could be termed "creative pre-borrowing." The biggest of Japan's stimulus packages came in the aftermath of the 1995 Kobe earthquake. The rebuilding effort was so intense it generated almost as much growth in gross domestic product (GDP) in 1996 as the country accrued throughout the rest of the 1990s combined. The downside is that all of these supplementary budgets were paid for on borrowed money, landing the Japanese government with the largest state debt -- some 144 percent of GDP -- in history. The Japanese rightly point to the fact that they have experienced very real -- and very strong -- growth in the past three years. But they shy away from mentioning that their government is still running massive budget deficits. For the 2004 fiscal year, the annual budget deficit hit a record of 36.6 trillion yen ($344.4 billion), or 45 percent of the total budget. Eventually interest rates will have to rise, and even a 1 percent increase in Japan's debt servicing would add about $50 billion -- more than the country's entire defense budget -- to Japan's annual financing costs. The current recovery is nothing more than a flash in Japan. Toyko already is on guard against such jaded thinking. While Koizumi was touring the damage, Finance Minister Sadakazu Tanigaki announced that not only was Japan not planning on a nationwide revitalization effort, but it would not even likely need to sell more bonds to fund the reconstruction work. Tanigaki said such a package of new debt was not necessary because it has a surplus -- a word the Japanese have not used since the 1980s. The finance minister estimates the revenues from fiscal year 2003 were so far above expectations that the government has a 1 trillion yen ($9.4 billion) surplus. Before the excitement takes hold, however, allow us to explain. Just as the Japanese have their own economic model, which favors cash flow over profitability, they also have their own way of defining the word "surplus." Instead of meaning that revenues outstripped expenditures, Tanigaki means the government borrowed more money last year than it needed to, and so it did not happen to spend all of it. Now it will.