Shaw Capital Management Newsletter: Japan Submits Budget for 2010

The Democratic Party of Japan (DPJ) government submitted to the Diet the fiscal 2010 budget amounting to ¥92.3 trillion, its first budget since its inauguration in mid-September. The budget was even larger than its counterpart for the current fiscal year — which was already a record if one includes the second supplementary stimulus package, approved last December. This was because of additional spending on child allowances, free senior high school education, cash subsidies to farmers, and higher payments to medical institutions to alleviate the shortage of medical doctors. Particularly noteworthy is the large amount devoted to social security, up to ¥27.3 trillion, which account for 51% of general public spending … the first time that the social security share has exceeded 50%. In marked contrast, public works investment, which has been cut back by almost 20%, amounts to ¥5.8 trillion, a record drop that symbolizes the DPJ’s philosophy of shifting money to people from public works... eightynine dam projects are likely to be frozen.

At a news conference, Prime Minister Yukio Hatoyama described it as “a budget meant to safeguard the life of the people.” He also claimed that three reforms were incorporated in the architecture of the budget: first, the principle of a shift of priority “from concrete to people”; second, initiatives taken by politicians instead of bureaucrats; and third, securing transparency in the budget formulation process. Some creditable aspects notwithstanding, the budget bill appears to be overshadowed, as media reports made clear, by concern over a severe revenue shortage and its implications for the future of Japan’s public finances, which are already debt-laden to a perilous extent as recently pointed out by credit rating agency Standard & Poor’s which raised the prospect of a downgrade in Japan’s sovereign debt rating.

“The budget bill appears to be overshadowed by concern over a severe revenue shortage and its implications for the future of Japan’spublic finances, which are already debt-laden to a perilous extent.”

“Japan’s economic policy flexibility has diminished as a result of increased fiscal deficits and government debt, persistent deflation and a prospect of continued sluggish economic growth”, analysts at the firm said in a note. “It’s impossible to keep tolerating this massive spending,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. “Japan’s fiscal health will continue to be exceedingly severe given revenue won’t grow and a stagnant recovery may require additional economic measures.” A major reason for the squeeze is a plunge in prospective tax revenues due to the economic downturn and the drop in corporate profits. Tax revenues for fiscal 2010 are estimated to fall to ¥37.4 trillion, the same level as 26 years ago, in the mid-1980s — while corporate tax revenues are expected to be half the amount in normal years. As a result, the government has to raise ¥44.3 billion in new government bonds, compared to ¥53.5 trillion in FY2009. This leaves the treasury dependent on debt for 48% of the total budget, up 10 percentage points. At the end of the fiscal year, on March 31, 2011, the outstanding balance of government bond issues will have shot up to ¥637 trillion, the equivalent of 134% of Japan’s GDP while public debt will probably spiral to ¥973 trillion, almost double GDP.

“At the end of the fiscal year, on March 31, 2011, the outstanding balance of government bond issues will have shot up to ¥637 trillion, the equivalent of 134% of Japan’s GDP while public debt will probably spiral to ¥973 trillion, almost double GDP.”

According to the new government, the economic policies adopted by the previous ruling party, the Liberal Democratic Party (LDP), failed on two fronts: initially boosting demand by increasing public investment, which was effective in the short term but not sustainable until the end of the 1990s. And later enhancing the supply side of the economy by deregulating the labour market and privatizing public entities, which simply widened the income gap within the economy, in the 2000s. However, the new budget was not well received by most observers. The announcement was rather sudden and lacked a comprehensive path to achieve the stated goals, they claim. Also, no reliable, specific incentives were offered, such as tax changes or deregulation that affect private sector behaviour.

More importantly, given its enormous debt, the government has limited room to offer any incentives without jeopardizing other parts of the economy. However, there was no mention of these painful trade-offs. In addition, while the budget contains some signs of change, there is concern that it may not adequately stimulate the economy. Most private sector economists believe that spending measures in the fiscal 2010 budget (and in the second fiscal 2009 supplementary budget) are expected to provide a limited boost to Japan’s GDP and to kick in no sooner than April. “Most private sector economists believe that spending measures in the fiscal 2010 budget are expected to provide a limited boost to Japan’s GDP and to kick in no sooner than April.”

Overall, the budget appears to be the result of a compromise between an attempt to impose some fiscal discipline and the promises made in last year’s summer election of new direct supports to households, such as child allowance, as well as concern over a double-dip recession. “Harsh financial conditions have prevented the administration from keeping all the promises that the DPJ made during its campaign last summer (for instance it has eliminated highway tolls and the gasoline tax). But the administration has succeeded, to some extent, in realizing the party’s slogan of “shifting weight to people from concrete” and its aim of providing more funds for households, rather than for industry-linked organizations and large-scale public works projects”, asserted in its editorial the Japan Times, one of the main national newspapers.

“Almost every move the government makes over the coming months must be seen against the backdrop of the crucial upper house election, which must be held in July for half of the seats.”

The budget must now be approved by Japan’s parliament before taking effect. Hatoyama’s popularity has dropped to 48% this month from 71% after he took the office in September. Almost every move the government makes over the coming months must be seen against the backdrop of the crucial upper house election, which must be held in July for half of the seats. So in the end the budget and its goals may be more dream than reality.

Foreign Exchange Markets 2010: Shaw Capital Management

The main feature of the foreign exchange markets over the past month has been the further sharp fall in the euro. There has been no real change in the background economic situation in the euro-zone; but there has been a serious deterioration in the financial background as doubts have increased about the ability of Greece and some other periphery countries to cope with their massive fiscal deficits and service their sovereign debts.

Foreign Exchange Markets 2010: Shaw Capital Management Korea: This is clearly leading to a withdrawal of international funds from the European capital markets, and is dramatically illustrated in the widening of yield spreads in the bond markets of member countries. There is still a general assumption that the stronger members will provide support for the weaker members if this proves to be necessary to prevent a default on sovereign debts.

But the uncertainties have been increased by conflicting statements from the European Central Bank and some politicians about the willingness to undertake such operations, and so investors and speculators have taken evasive action, and the euro has fallen by around 10% from its peak in early-December.

This fall has provided support for the other major world currencies, including the dollar; but the background situations in Japan, and in the UK, also provide reasons for concern, and so the currency markets remain in a very uncertain state.

Foreign Exchange Markets 2010: Shaw Capital Management - It is likely that the uncertainty will continue. The US economy is clearly recovering from recession; economic conditions in Japan are very weak, and Japan appears to face the possibility of a credit downgrade if it does not take steps to reduce its massive fiscal deficit; and there have already been warnings from Standard and Poor’s that the UK also faces the possibility of a credit downgrade if there are no convincing measures to reduce its huge fiscal deficit after the forthcoming general election. Prospects are therefore very difficult to assess; but our tentative conclusion is that the dollar will continue to “improve”, helped to a considerable extent by weaknesses elsewhere; and that this will allow market pressures to gradually subside as the global economic recovery continues through the year.

But the possibility of a major currency crisis cannot be ignored, especially if the debt problems in Greece and other periphery countries threaten to lead to the break-up of the single currency system in Europe. It is fortunate therefore that the available evidence on the performance of the US economy is more encouraging. Non-farm payrolls fell again in December by 85,000, but are expected to have increased in January; retail sales held up well in the pre-Christmas period; manufacturing output is improving, according to the latest report from the Institute of Supply Management; and even the housing market appears to be recovering.

This general situation is reflected in the first preliminary estimate from the Commerce Department of growth at a seasonally adjusted annualised rate of 5.7% in the final quarter of last year, a higher figure than the market had been expecting. Most economists therefore appear to be forecasting overall growth this year in the 2.5% to 3% range, after the estimated fall of 2.4% last year.

Foreign Exchange Markets 2010: Shaw Capital Management - The Fed is clearly in no hurry to tighten its present monetary stance. The statement after the latest meeting of its Open Market Committee was more upbeat about the prospects for the economy; but shortterm interest rates were left unchanged and close to zero, and there was a clear indication that they would remain at very low levels “for an extended period”.

The bank did state that it will discontinue most of its emergency lending programmes, and that it would end its purchases of mortgage securities in March; but there was no indication that it would be prepared to implement an “exit strategy” until there was convincing evidence of a sustainable economic recovery. It is also unlikely that there will be any early changes in fiscal policy.

Shaw Capital Management March Newsletter: Japanese Government Submits Budget for Next Fiscal Year

Shaw Capital Management: Japanese Government Submits Budget for Next Fiscal Year

Japanese Government Submits Budget for Next Fiscal Year: Shaw Capital Management News

The Democratic Party of Japan (DPJ) government submitted to the Diet the fiscal 2010 budget amounting to ¥92.3 trillion, its first budget since its inauguration in mid-September. The budget was even larger than its counterpart for the current fiscal year — which was already a record if one includes the second supplementary stimulus package, approved last December. This was because of additional spending on child allowances, free senior high school education, cash subsidies to farmers, and higher payments to medical institutions to alleviate the shortage of medical doctors. Particularly noteworthy is the large amount devoted to social security, up to ¥27.3 trillion, which account for 51% of general public spending … the first time that the social security share has exceeded 50%. In marked contrast, public works investment, which has been cut back by almost 20%, amounts to ¥5.8 trillion, a record drop that symbolizes the DPJ’s philosophy of shifting money to people from public works... eightynine dam projects are likely to be frozen.

At a news conference, Prime Minister Yukio Hatoyama described it as “a budget meant to safeguard the life of the people.” He also claimed that three reforms were incorporated in the architecture of the budget: first, the principle of a shift of priority “from concrete to people”; second, initiatives taken by politicians instead of bureaucrats; and third, securing transparency in the budget formulation process. Some creditable aspects notwithstanding, the budget bill appears to be overshadowed, as media reports made clear, by concern over a severe revenue shortage and its implications for the future of Japan’s public finances, which are already debt-laden to a perilous extent as recently pointed out by credit rating agency Standard & Poor’s which raised the prospect of a downgrade in Japan’s sovereign debt rating. “The budget bill appears to be overshadowed by concern over a severe revenue shortage and its implications for the future of Japan’s public finances, which are already debt-laden to a perilous extent.” “Japan’s economic policy flexibility has diminished as a result of increased fiscal deficits and government debt, persistent deflation and a prospect of continued sluggish economic growth”, analysts at the firm said in a note.

“It’s impossible to keep tolerating this massive spending,” said Takeshi Minami , chief economist at Norinchukin Research Institute in Tokyo. “Japan’s fiscal health will continue to be exceedingly severe given revenue won’t grow and a stagnant recovery may require additional economic measures.” A major reason for the squeeze is a plunge in prospective tax revenues due to the economic downturn and the drop in corporate profits. Tax revenues for fiscal 2010 are estimated to fall to ¥37.4 trillion, the same level as 26 years ago, in the mid-1980s — while corporate tax revenues are expected to be half the amount in normal years. As a result, the government has to raise ¥44.3 billion in new government bonds, compared to ¥53.5 trillion in FY2009. This leaves the treasury dependent on debt for 48% of the total budget, up 10 percentage points.

 At the end of the fiscal year, on March 31, 2011, the outstanding balance of government bond issues will have shot up to ¥637 trillion, the equivalent of 134% of Japan’s GDP while public debt will probably spiral to ¥973 trillion, almost double GDP. “At the end of the fiscal year, on March 31, 2011, the outstanding balance of government bond issues will have shot up to ¥637 trillion, the equivalent of 134% of Japan’s GDP while public debt will probably spiral to ¥973 trillion, almost double GDP.”

According to the new government, the economic policies adopted by the previous ruling party, the Liberal Democratic Party (LDP), failed on two fronts: initially boosting demand by increasing public investment, which was effective in the short term but not sustainable until the end of the 1990s. And later enhancing the supply side of the economy by deregulating the labour market and privatizing public entities, which simply widened the income gap within the economy, in the 2000s. However, the new budget was not well received by most observers. The announcement was rather sudden and lacked a comprehensive path to achieve the stated goals, they claim. Also, no reliable, specific incentives were offered, such as tax changes or deregulation that affect private sector behaviour. More importantly, given its enormous debt, the government has limited room to offer any incentives without jeopardizing other parts of the economy. However, there was no mention of these painful trade-offs. In addition, while the budget contains some signs of change, there is concern that it may not adequately stimulate the economy. Most private sector economists believe that spending measures in the fiscal 2010 budget (and in the second fiscal 2009 supplementary budget) are expected to provide a limited boost to Japan’s GDP and to kick in no sooner than April. “Most private sector economists believe that spending measures in the fiscal 2010 budget are expected to provide a limited boost to Japan’s GDP and to kick in no sooner than April.”

Overall, the budget appears to be the result of a compromise between an attempt to impose some fiscal discipline and the promises made in last year’s summer election of new direct supports to households, such as child allowance, as well as concern over a double-dip recession. “Harsh financial conditions have prevented the administration from keeping all the promises that the DPJ made during its campaign last summer (for instance it has eliminated highway tolls and the gasoline tax). But the administration has succeeded, to some extent, in realizing the party’s slogan of “shifting weight to people from concrete” and its aim of providing more funds for households, rather than for industry-linked organizations and large-scale public works projects”, asserted in its editorial the Japan Times, one of the main national newspapers. “Almost every move the government makes over the coming months must be seen against the backdrop of the crucial upper house election, which must be held in July for half of the seats.”

The budget must now be approved by Japan’s parliament before takingeffect. Hatoyama’s popularity has dropped to 48% this month from 71% after he took the office in September. Almost every move the government makes over the coming months must be seen against the backdrop of the crucial upper house election, which must be held in July for half of the seats. So in the end the budget and its goals may be more dream than reality.