For the fourth year in a row, the government is set to rely for revenue more on new bond issuance than on taxes. Gross state debt is already equivalent to twice the country’s annual GDP. We covered the fundamental outlook and challenges facing the Japanese economy and the Japanese Yen - Will Japanese Yen Weakness Continue? – mainly focusing on the central bank’s expansion of its balance sheet and the difference between the US an Japanese 2-year yields which created a flow towards US bond market and away from Japan, boosting the USD. We have seen other forms of carry trade pick up as well, as all higher yielders (AUD, NZD, CAD, GBP, EUR) continue push higher against the JPY.
For a look at the technical picture of various JPY crosses, see today’s technical update: Japanese Yen Displaying Weakness – A Look a USD/JPY, EUR/JPY and GBP/JPY
The concern is now turning to the sustainability of the Japanese debt situation, as the government will have to rely on debt issuance to meet its fiscal spending, which has created concern that the central bank will have to buy more bonds, and thereby help “monetize the government’s debts.”
In today’s session, there was rumors of a think tank putting forth a dovish expectation for the Bank of Japan, which has limited options but to continue money printing and bond purchases – which has one benefit of weakening the JPY (and helping exporters) but also creates extra uncertainty around Japan’s fiscal and monetary policy.
Fiscal Policy Shows Reliance on Borrowing to Finance Deficits
Here’s a few choice quotes and charts to get a better handle on the issues facing Japan:
From ZeroHedge: The government said it plans to sell 44.2 trillion yen of new bonds to fund 90.3 trillion yen of spending in next fiscal year’s budget. It estimates that tax revenue will total 42.3 trillion yen in fiscal 2012, meaning that new bond sales will exceed tax revenue for a fourth year.”
From Marketwatch: “The government budgeted ¥44 trillion in net additional borrowing in the next fiscal year, nearly half of its expenditures. It needs to double its tax revenue to balance the budget. But, as the economy is deflating with declining private consumption, a major tax increase would cause the economy to go down more, shrinking the tax base and requiring even bigger tax increases to balance the budget.”
USDJPY Daily
Beige Book Paints Encouraging Picture, But Will It Last?
According to the latest Beige Book, all twelve Districts reported ongoing economic growth, with most registering a “modest to moderate” pace.Manufacturing remains a key driver of growth, with particular strength among automotive and technology firms.
Meanwhile, “strengthening” auto sales, solid tourism and unseasonably warm weather supported stronger consumer spending.
For the second report running, residential real estate registered a meaningful improvement across most Districts (especially in the multi-family space). Reports on the non-residential side of the market have been improving but remain mixed.
Hiring activity held steady to increased modestly, with many firms still favoring temporary over permanent employment and frequent reports of skilled labor shortages.
Throughout this month's report, rising energy prices were cited as a concern both because of their impact on consumer spending and inflation.
Key Implications
Today's Beige Book was one of the more encouraging reports since the recovery started. Notably, the momentum from February's report was sustained across a broad swath of industries (including residential housing) and regions. Furthermore, there was no indication that economic growth softened in March, despite the slowdown in job creation.
The question now is whether growth can be sustained at a “modest to moderate” pace. Scattered throughout this report were legitimate concerns over high gas prices, the likelihood of softer auto sales in the months ahead, and the possibility that an unseasonably warm winter has artificially strengthened first quarter consumer spending.
We believe economic growth will remain near 2.0% over the first half of the year, before accelerating above 2.5% in Q3 and Q4 as consumer spending and residential housing investment pick-up steam.
jpy:
As widely expected, the central bank maintained its key policy rate at a range of zero to 0.1 percent by a unanimous vote.
The BOJ kept its assessment of the economy roughly unchanged, saying that while economic activity has remained more or less flat it has shown some signs of picking up.
Governor Masaaki Shirakawa will hold an embargoed news conference with his comments expected to come out sometime after 4:15 p.m. (0715 GMT).
The BOJ also announced details of a new dollar lending arrangement established as part of measures to boost Japan's potential growth.
Financial institutions can tap the loans offered by the BOJ at the six-month dollar LIBOR rate, with a duration of one year. The loans may be rolled over up to three times.
The deadline for applications for the new loans was set at March 2014.
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