Saturday, April 11, 2009

A Couple of Political Points, Plus One Digression, on the Latest Economic Package

The latest economic package announced by the LDP-New Komeito coalition on Friday identifies two crises precipitated by the global financial and economic crises—the short-term risk that the Japanese economy will collapse and the structural weakness of an export-reliant economy—and proposes a three-step recovery process aimed at avoiding economic collapse (~FY2009 Q3-4), securing an economic recovery (FY2009 Q3-4~FY2010 Q3-4), and putting Japan on a new growth trajectory (FY2010Q3-4~). To that end, the coalition proposes to inject 56.8 trillion yen into the Japanese including yet another supplementary budget with 15.4 trillion yen in “freshwater”, or new money. I have little to say about the economics; the economic analysts themselves are all over the place on that and I’ve seen at least one that appears to be what we in Japan call “cherry blossom”—more on cherry blossoms on a later blog—so why bother adding more noise? Instead, I’ll raise a couple of points on the political side that are sure to be passed over by the media.

Before I do that though, I fail to resist this one digression, a repetition, actually. There is little attention being paid to the 56.8 trillion yen for the overall package of which \41.8 trillion yen belongs to the financial sector, mainly financing for working capital. The authorities themselves have for some time stopped touting the total figures for stimulus packages because the media have tended to criticize them—sometimes rightfully—for inflating the true value of the package and focus on the “freshwater” instead. However, in the current situation, there is a real danger of the business sector being hit by a giant credit crunch as the result of a shrinking cash flow caused by plummeting production and a lending squeeze by skittish banks anxious to avoid the kind of financial crisis that the rest of the “West” is going through. As a measure of how potentially serious the situation is, the authorities have already opened access to “small and medium” enterprise lending facilities to 100% subsidiaries of big businesses—the banks are not, to the best of my knowledge, complaining about the competition. So this time around, the 56.8 trillion yen, or 41.8 trillion yen if you prefer, does means something.

Now, to the politics. The package itself has been put forth as a joint ruling-party/government decision, with the full document available here on the LDP websiteand here on the Prime Minister’s Office website. One point in the full document that is unlikely to be picked up in the media is that the PKO (price-keeping operations for the Japanese stock market) provisions* leave the necessary legislation for consideration by the ruling parties. Now, few legislative bills of substance—that is, bills that have immediate budgetary consequences—that pass into law are submitted by Diet members; instead, most come from the sitting Cabinet, drafted by the ministerial bureaucracy and vetted by the Cabinet Legislation Bureau. Rarely if ever has a bill that is part of a government policy package been left in the hands of Diet members. The ruling coalition may indeed submit the requisite bills on its own; more likely, it is may only be a political trophy being claimed by the group of stock market-friendly LDP politicians—it is to be noted that the historical relationship between the market and LDP politicians has not always been a wholesome one—pushing this idea, who will toss back a prearranged outline back to the bureaucracy to fill out the details for Cabinet approval and submission. Either way, it surely reflects a genuine reluctance on the part of the ministerial authorities—the Financial Services Agency (FSA) and possibly MOF—who fear contaminating the stock market through politically motivated interventions, and likely signals a subtle shift in power between the political and the bureaucratic. The overall change has been going on for some time now, so the significance of this particular incident should not be exaggerated. Still, (what I believe to be) its formal recognition is notable, and should be recorded as such.

Another point of note and of more political consequence is the fact that it is indeed an economic package of historical proportions, particularly as it comes on the heels of two other stimulus packages and the new regular budget that came into effect a little more than a week ago. Discussion of its appropriateness and adequacy I leave to more learned if divided sources, but I cannot deny the sense of a genuine effort in size and scope to rise to an historical occasion, while the DPJ response is visibly lacking in this sense of political drama. I am, to repeat, incapable of passing economic judgment on its choice; I am quite sure, though, that this will hurt it come the Lower House election.

Incidentally, I’ve asserted that the DPJ’s relative lack of response to the economic crisis can be traced to Ichiro Ozawa’s indifference to policy issues. The latest initiative from the LDP-New Komeito coalition also highlights the enormous gap in policymaking expertise. If DPJ leaders think that a DPJ-led administration can better push its agenda by placing one hundred Diet members into the ministries—effectively doubling the number of political appointees—they are in for an unpleasant surprise.

* ○Utilizing the Bank Shareholdings Purchase Corporation
Preferred shares (preferred capital investment securities), ETF and J-REIT owned by financial institutions and preferred shares (preferred capital investment securities) of financial institutions held by business-operating juridical persons [think non-financial corporation] shall be added to the shares eligible for purchase by the BSPC (necessary legislation to be considered by the ruling parties).
○Responding to the Stock Market
A mechanism for government-related institutions to purchase shares, etc. from the market as extraordinary and exceptional measure shall be established in order to prepare for an exceptional case such as one where a situation continues of a serious obstruction of the price-discovery function of the market (necessary legislation to be considered by the ruling parties). Necessary budgetary measures, such as a \50 trillion yen government guarantee tranche for purchases—shall be taken.
○ 銀行等保有株式取得機構の活用
○ 株式市場への対応

My snarking on the Newsweek article to be continued.

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