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Tuesday, April 5, 2011

Bonds, not taxes, should fund recovery, experts say

Sakakibara: Sell JGBs to raise ¥20 trillion


Staff writer

The government should draft a supplementary budget of at least ¥10 trillion or even ¥20 trillion to rebuild areas damaged by the Great Eastern Japan Earthquake and raise the money by issuing government bonds instead of hiking the consumption tax, economists and financial experts said Monday.

"We should not raise taxes immediately because it would have a negative impact on the economy," said Eisuke Sakakibara, former vice minister of finance for international affairs at the Finance Ministry, at a press conference held at the Foreign Correspondents' Club of Japan.

The debate so far has focused on whether the money should come from government bonds or higher taxes.

Sakakibara said he wants to see ¥20 trillion budgeted for the reconstruction, financed by government bonds.

Although Japan has a total public debt worth about 180 percent of its gross domestic product — the highest among developed countries — Japan's entire household assets are worth about 220 percent of GDP, which means it is still possible to issue new bonds, Sakakibara said.

Kyohei Morita, chief economist at Barclays Capital Japan, agreed, saying that JGBs should be used instead of the consumption tax to finance a supplementary budget.

"In my view, at least, we should probably spend ¥10 trillion" on the budget this fiscal year, said Morita.

According to Morita, the devastated areas account for about 6 to 7 percent of Japan's GDP. Nevertheless, Morita and Sakakibara agree that a tax hike will be a must in the medium to long term.

Known as "Mr. Yen" because of his influence over the currency markets when he was a senior Finance Ministry official, Sakakibara also said the yen may further depreciate against the dollar as money is withdrawn from Japan.

Sakakibara said he would not be surprised if the exchange rate falls just shy of ¥90.

Since the quake, the yen's value has been declining. On March 11 it was a stout ¥81.4. But as of 9:30 p.m. Monday, the yen had slipped to just below 84 to the dollar.

While the economic damage from the disaster is huge, the experts expect a swift recovery with significant government assistance.

"Probably, the GDP in (fiscal) 2011 will decline in the first half, but with a major government effort" it will recover by the end of 2011 or early 2012, Sakakibara predicted.

If the government spends at least ¥10 trillion this fiscal year, "we'll probably be able to avoid falling into negative territory," said Barclays' Morita, adding that growth in fiscal 2011 would be 0.8 percent under such conditions.

The experts also expressed concern over disruptions to the supply chain caused by the natural disasters, as well as the rolling blackouts implemented by Tokyo Electric Power Co. Tohoku is home to many parts and components factories.

Kathy Matsui, chief Japan equity strategist at Goldman Sachs, for instance, notes that just two Japanese companies account for more than 90 percent of the global supply of BT resins, which are used in electronic devices, such as smart phones. Those companies' factories are located in Tohoku and have been affected.



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