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ASIA FOCUS
POST REPORTERS
As Japan starts to witness a slight economic slowdown, fears have emerged that the much-awaited awakening may be a blip on the radar screen and that the country could slip back into recession.
However, some policy changes that the government is undertaking could help propel the world's second largest economy, analysts say.
After having undergone one of the longest recessionary phases, Japan's economy only recently started to return to life. But the rise of China and other nations, coupled with a slowing economy across the globe thanks to the spikes in oil prices, have spurred the Tokyo government into revival mode.
Moody's Investors Service expects the Japanese economy to slow for the rest of this year and next but does not foresee an impact on future potential or on the government's local currency rating.
The ratings agency, however, notes a possible risk from a policy change under consideration by some new leaders of the ruling Liberal Democratic Party, who are more amenable to deficits than their predecessors.
"The special features of the Japanese system that make government debt affordable despite its exceptional size have not been negatively affected by recent macroeconomic shocks; neither by the rise in inflation, nor the slowdown in GDP growth," Thomas Byrne, a senior vice-president with Moody's Sovereign Risk Group, wrote in a report. "Current monetary policies have supported economic growth and a process of fiscal consolidation is being carried out."
Accordingly, Moody's believes the government's credit ratings will hold up as long as the policy framework remains prudent.
Moody's preliminary base-case scenario is that real growth will drop slightly below 1% in fiscal 2008 and pick up moderately in fiscal 2009, says Mr Byrne.
But signs of efforts to rejuvenate stalled domestic consumption have been seen since a recent cabinet reshuffle. Most notable was the appointment of Consumer Affairs Minister Seiko Noda, who has been tipped to become the nation's first female prime minister at some point.
She has forecast a consumer revolution as a result of new consumer protection laws due to be introduced soon.
A feisty politician who was expelled from the LDP at one point because of her opposition to former prime minister Junichiro Koizumi's postal privatisation plans (she was later readmitted to the party), Ms Noda said the introduction of an official consumer affairs agency could bring about "startling changes".
Her comments provided further evidence of new thinking among members of Prime Minister Yasuo Fukuda's new cabinet, which was announced Aug 2.
Last Monday, Financial Services Minister Toshimitsu Motegi proposed tax reforms to encourage Japanese firms to repatriate up to 17 trillion yen (S$220.5 billion) of overseas profits, which he said could boost the economy.
Some LDP officials have even argued that raising Japan's ultra-low interest rates could serve to boost consumption.
"Interest rates have been kept low for so long and this may be negatively affecting consumption," said Takashi Sasagawa, head of the LDP's general council.
Ms Noda argued that a focus on economic growth had led to neglect of consumer interests in Japan, which is one reason why personal consumption has been much more restrained than in other advanced economies.
The new consumer agency, which Ms Noda is expected to head, will act as a "control tower" to monitor all government ministries to ensure that consumer interests are safeguarded in the implementation of official policies. It will have jurisdiction over other ministries and will co-ordinate the work of a network of regional consumer affairs centres.
The government is also due to unveil an economic stimulus package worth 2-3 trillion yen. It is expected to help individuals and businesses cope with high oil and other commodity prices but its impact on personal consumption (which accounts for 55% of GDP in Japan) is likely to be limited, analysts say.
However, Moody's says the new senior leaders of the LDP have stated that shelving former prime minister Koizumi's goal of reducing the budget deficit to produce a small surplus could be considered as an option for dealing with the current slowdown.
"If such a change were adopted, it would mark a major policy shift, raising doubts about of the commitment to fiscal consolidation, and stall the incipient improvement in the government's debt trajectory," Mr Byrne says.
Government debt, which stands at almost 200% of GDP according to the IMF, is three times the average level of other G-7 countries.
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