Japan's Central Bank Sounds Warning on Global Economy By HIROKO TABUCHI Published: October 7, 2011
TOKYO — The Japanese central bank sounded the alarm over the risks facing the world economy, even as it left its monetary policy unchanged Friday, underscoring the gravity of a global economic slowdown over which policy makers may have little control.
Also Friday, the Japanese cabinet outlined a supplemental budget of ¥12 trillion, or $155 billion, for the reconstruction of areas affected by the natural and nuclear disasters this year, the third such budget, and approved a plan to raise taxes temporarily to fund the effort.
The latest emergency budget follows about ¥6 trillion already earmarked in two supplemental budgets this year. It includes money to help relocate survivors and create a fund to revitalize the economy of Fukushima Prefecture, which has been hit hard by the nuclear crisis.
The government will raise up to ¥11.2 trillion from temporary taxes to help cover costs of rebuilding, according to the provisional tax plan. Officials have said they would also cut unnecessary government expenditures and sell state-owned assets, possibly including the government’s entire stake in Japan Tobacco.
The government has yet to work out the details of any extra spending, as well as tax increases, and must also win the approval of a divided Parliament. It aims to submit the budget to Parliament later this month, according to Kyodo News.
“The uncertain outlook for the global economy and instability in financial markets are underscoring the downside risks for Japan’s economy,” said Masaaki Shirakawa, the Bank of Japan governor.
The world’s advanced economies, in particular, are on the brink of a major slowdown, threatening the Japanese economy, he warned. The European debt crisis has started to cause real damage to the economies in Europe and beyond, he said.
“European financial markets remain tense, as there have been moves in money markets similar to those seen during the Lehman crisis,” he said, referring to the collapse of Lehman Brothers in September 2008. “What’s different is that the credibility of government debt has become the target of market worries, and this has resulted in bigger impact.”
The global economic problems have affected the Japanese economy just as it has shown signs of recovery following the hugely disruptive earthquake and tsunami in March, and the subsequent nuclear crisis. Economists say they expect figures to show that Japan emerged from recession in the third quarter, as companies restored supply chains disrupted by the disasters.
The International Monetary Fund forecasts that the Japanese economy will grow 2.3 percent in 2012, the fastest among advanced economies, thanks to Japan’s large fiscal outlays for reconstruction, in contrast with fiscal austerity measures imposed elsewhere in the world.
But prospects for a strong rebound of the country’s exports — on which Japan ultimately depends for economic growth — are looking increasingly frail.
Particularly worrying has been the strong yen, which has surged as investors look for a haven in which to park their assets. The strength of the yen has hurt Japan by making its exports less competitive and eroding exporters’ overseas profits.
Still, the central bank, with interest rates already near zero and a reluctance to flood the economy with more money, has little left in its policy arsenal to bolster the Japanese economy.
Its kept its key interest rate untouched at a range of zero to 0.1 percent and maintained the size of its asset-buying program.
It extended by only six months a ¥1 trillion emergency loan program for regions hit by the March disasters. Half that amount remains untapped amid a still-tepid economic recovery in disaster-affected areas.
The bank’s decision came after the European Central Bank also kept interest rates steady, though it threw a lifeline to struggling banks to ward off a credit crunch. Also Thursday, the Bank of England announced a second round of monetary easing.