Japan Faces ¿Another Leg Down' in Its Fiscal Health After Quake

By Christopher Anstey
(c) 2011 Bloomberg News
Saturday, March 12, 2011; 5:54 AM

The 8.9 magnitude shock devastated areas of northeast Japan including parts of Sendai, a city of 1 million that's 300 kilometers (186 miles) north of Tokyo. The Tohoku region accounts for about 8 percent of gross domestic product, is host to factories making products from cars to beer, along with energy infrastructure including a nuclear power plant the government said is at risk of meltdown after an explosion.

Factory shutdowns, power cuts and the damage to consumer confidence may hurt Japan's GDP for a period of months, while later contributing to growth as rebuilding occurs, economists said. Paying for the rebuilding risks hurting demand for Japanese government bonds, said Alicia Ogawa.

"A supplementary budget is like the last thing that people watching the JGB market want to hear," said Ogawa, adjunct professor at Columbia University's School of International and Public Affairs in New York, and a former Japanese banking analyst who lived in the nation for 15 years. The prospect of rebuilding "signals another leg down in Japan's fiscal health. So I'm concerned that in the short to medium run, there's going to have to be more borrowing," she said.

The Ministry of Finance projected in January that government debt will increase 5.8 percent to a record 997.7 trillion yen ($12.2 trillion) in the year starting April 1. That signaled Prime Minister Naoto Kan would break his pledge to limit bond sales to 44.3 trillion yen a year.

For Kan, the task of assembling a reconstruction plan adds to a burden that includes his failure so far to persuade opposition lawmakers to enact bills allowing the government to sell deficit-financing bonds in the coming fiscal year. The largest opposition party has signaled it's prepared to endorse post-earthquake spending.

"We will probably need a supplementary budget to work on this," Sadakazu Tanigaki, who heads the Liberal Democratic Party, told reporters yesterday after Kan convened a meeting of party leaders. "We will cooperate with all our might."

Japan's bond market has so far failed to signal concern at the fiscal outlook, with more than 90 percent of government debt held by domestic investors led by financial companies. The yield on the benchmark security due in 2021 was 1.27 percent late yesterday in Tokyo, compared with an average of 1.39 percent over the past decade.

"This situation is likely to reverse as the government ramps up spending -- and deficit financing -- to repair the damage," Dan Ryan, an economist at Lexington, Massachusetts- based IHS Global Insight. "Considering that Japan's sovereign debt was recently downgraded, financial markets may become more wary of even an incremental increase in government borrowing and bond issuance."

Japan's rating outlook was lowered to negative from stable by Moody's Investors Service Feb. 22 on concern that political gridlock will constrain efforts to tackle the debt burden. The ranking is Aa2, the company's third highest. Standard & Poor's cut its grade in January to fourth highest.

Stocks already began to respond to the quake, with the Nikkei 225 Stock Average tumbling 1.7 percent by the close March 11, which came 14 minutes after the 2:46 p.m. strike of the main earthquake, which has been followed by scores of aftershocks.

Companies from Sony Corp., Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. to beermaker Sapporo Holdings Ltd. and refiner JX Nippon Oil & Energy Corp. shut down facilities in northern Japan. Cosmo Oil Co. suffered a fire at a refinery in Chiba, outside Tokyo, while Tokyo Electric Power Co. battled to avert a meltdown to a nuclear power station 220 kilometers north of Tokyo after cooling systems failed.

The devastation has caused the death of at least 500 people, with more than 700 people reported missing as of the afternoon March 12. Kan, returning from an inspection of the devastated area around Sendai said he would mobilize 50,000 Self Defense Force personnel to aid the relief effort.

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