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Tuesday, Feb. 17, 2009

BOJ must back bond flood: expert

Despite inflation risk, its up to the central bank to be underwriter


Staff writer

The October-December gross domestic product figures announced Monday, marking the sharpest fall in 35 years, sent shock waves through recession-racked Japan.

News photo
Yukio Noguchi YOSHIAKI MIURA PHOTO

But according to one of the nation's most influential economists, darker clouds are on the horizon. The drop reported Monday is only the beginning of the worst, and Japan may see a 10 percent decline in GDP for all of fiscal 2009, Yukio Noguchi, a professor at Waseda University's graduate school of finance, said in an interview with The Japan Times.

He has said this prediction may seem "unbelievable" to many, but nonetheless it is a likely possibility for the export-dependent economy.

"Considering the speed of the shrinkage in the U.S. trade deficit, the chance is extremely low (the negative economic growth) could stop at the October-December quarter of 2008," Noguchi said.

The only way to save the country from the looming unprecedented crisis is for the government to issue massive amounts of bonds — up to ¥30 trillion — to launch vast stimulus measures centered on public works projects, he said.

To carry out the plan, the Bank of Japan would have to underwrite government bonds — a legally prohibited taboo — despite the risk of unleashing inflation, Noguchi argued.

He pointed out that gross exports in December fell 35 percent from a year earlier, and those of the first half of January plummeted 46 percent.

"Therefore, (negative economic growth) will continue until at least the middle of fiscal 2009," Noguchi predicted, warning the negative economic growth could last until the end of this year.

Noguchi's bold prediction is far more pessimistic than earlier forecasts by other research institutions as well as the BOJ.

For fiscal 2009, the BOJ forecast economic growth of minus 2 percent. Real growth won't resume until fiscal 2010, when the economy is predicted to grow by 1.5 percent, according to the BOJ.

But Noguchi argued the situation is far more severe, because four types of bubbles are bursting.

They include U.S. housing prices, securitized products, U.S. consumption made possible by consumer loans for housing collateral, and the value of the yen, which he argued had been kept weak against the dollar.

Noguchi pointed out that the BOJ has maintained extremely low interest rates in recent years that consequently kept the yen's value low and thus greatly benefited the country's exporters.

The low exchange rate helped maintain the old structure of export-dependent manufacturing, instead of fostering innovations to create a new market frontier, Noguchi argued.

But the recent yen's rise amid the global crisis has started severely hurting exporters and thus the whole economy.

Noguchi also pointed out that Japan sells industrial parts and machines to China, where consumer goods are manufactured and then exported to the U.S.

As the Chinese exports to the U.S. fall, the Japanese exports to China also decline, further damaging the economy, he said.

Noguchi stressed that Japan needs to consider both short-term and long-term solutions to the crisis.

One long-term goal would be to change the country's industrial structure to reduce its dependence on exports.

A short-term solution would include fiscal expenditures of up to around ¥30 trillion to cope with the plunge in demand and soaring unemployment.

Having the BOJ underwrite such a massive amount of government bonds would be the only viable option, because private-sector investors would not able to digest them on the market, Noguchi said.

The government must show an exit strategy clearly in advance before embarking on such a course, including a pledge to immediately halt the issuance of government bonds once the economy starts growing again, he said.

Noguchi acknowledged that the BOJ is prohibited by law from underwriting state bonds because of the inflationary threat of such action, but noted the Diet could approve this without having to revise the law.



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The Japan Times

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