Japan will hope that modest fiscal spending and ultra-loose monetary policy can minimise the damage from Friday’s devastating earthquake and tsunami on an economy just emerging from a lull.
Ruling and opposition parties have called a truce to allow the government to focus on dealing with the aftermath of a 8.9 magnitude quake that struck northeast Japan and triggered what could be the world’s worst nuclear disaster in 25 years.
Analysts say the quake may delay but not derail Japan’s return towards a moderate economic recovery.
Policymakers are lining up options for supporting growth, although their choices are limited with Japan in a dire fiscal condition and interest rates already virtually zero.
Below are some likely policy options:
Fiscal spending with emergency budget
Japanese leaders are pushing for an emergency budget for disaster relief and reconstruction. But finance minister Yoshihiko Noda said on Saturday it would be hard to compile an extra budget by the end of this month, when the fiscal year ends, as it takes time to estimate the cost of the damage, which is needed to come up with a budget size.
That means the government will tap the 200 billion yen ($2.44 billion) in reserves set aside under the current budget for disaster relief and other emergencies, before mulling an extra budget.
Reconstruction costs are certain to be staggering.
The government may end up compiling an extra budget of around 3 trillion yen, about the amount spent in the aftermath of a huge earthquake in Kobe, western Japan, in 1995.
While an extra budget of that size might meet costs for reconstruction and disaster relief, it is unlikely to have a sizable impact on Japan’s $5 trillion economy, analysts say.
Some warn, however, that the size of the extra budget may be smaller than after the Kobe disaster.
“This time, the government can’t afford to spend as much as after the 1995 quake given Japan’’s dire fiscal situation,” said Takuji Okubo, chief economist at Societe Generale in Tokyo.
“The amount of spending in the extra budget will likely be around 1 trillion yen, and the government is likely to finance this by reallocating spending rather than boosting new bond issuance.”
BoJ eases monetary policy further
For the time being, the Bank of Japan will focus on flooding markets with cash via its market operations to ensure borrowing costs stay low and there is no disruption to Japan’s banking system.
That means it will on some occasions pump 2 trillion to 3 trillion yen into the banking system through its daily morning market operations, two to three times the normal amount.
The monetary policy response will depend much on how Tokyo stocks and the yen move in the aftermath of the quake, and how market developments could affect Japan’s economy.
Analysts say the quake won’t shake the economy enough to
derail its return to a moderate recovery later this year. While
factory output may briefly slump, subsequent reconstruction work will boost demand, they say.
But the BoJ may ease monetary policy further in coming months if stock prices tank or the yen spikes at a pace fast enough to hurt the export-reliant economy.
With interest rates virtually at zero, the most likely option is for the BoJ to top up the 5 trillion yen pool of funds it put in place last year to buy assets ranging from government bonds to private debt.
More drastic options — such as boosting its long-term government bond purchases from the current 21.6 trillion yen per year — would emerge as a possibility only if markets remain unstable for a long time and warrant a longer-term policy approach.
Govt intervenes to halt yen rise
The yen has risen against the dollar after Friday’s earthquake on expectations that Japanese investors will repatriate funds back home.
Japanese policymakers may tone up their warnings against excessive moves if the yen heads toward the 15-year high hit in November last year.
Tokyo may find it easier to gain international understanding
for stepping into the market to curb yen gains if it justifies the move as aimed at keeping afloat an economy suffering from the severe damage brought about by the quake.
But analysts say it would take a yen spike well above the currency’s all-time high of 79.75 per dollar in 1995, for Japanese authorities to seriously consider intervening in the currency market.
“Up till now, it has been difficult for Japan to intervene due to harsh international criticism. That may change,” said Takahide Kiuchi, chief economist at Nomura Securities in Tokyo.
“But Japanese authorities are unlikely to intervene in the market immediately at the current yen level.”
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