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Senina Daria, The Economy of Japan in 2011 Печать E-mail
11.05.2012 г.
Daria Senina

In 2011 Bank of Japan proceeded to keep the uncollateralized overnight call rate about 0-0,1% and followed the policy of quantitative easing based on statistical data about gradual and stable recovery of Japanese economy. Bank of Japan also created funds to support the economy growth.

The situation strongly changed after March, 11th, 2011, when the Great Eastern Japanese Earthquake occurred and was followed by accident at the nuclear power plant “Fukushima 1”. The earthquake affected the region Tohoku where many industrial plants are located. Eventually, the economy of the country suffered as well as financial sphere as Bank of Japan took the decision to enlarge quantitative easing. On March, 14th, 2011, Policy Board approved the following:

- Bank of Japan will supply enough reserves to satisfy the demand of financial markets and will do all possible to guarantee the stability of financial market,
- Bank of Japan proceeds the policy of zero interest rates,
- Bank of Japan took the decision to enlarge the funds of Asset Purchase Program by 5 trillion yen to 40 trillion yen in total.

The above mentioned Program will cover the following asset categories:

- Japanese government Bonds – 0,5 trillion yen
- Treasury discount bills – 1,0 trillion yen
- CP – 1,5 trillion yen
- Corporate bonds – 1,5 trillion yen
- ETFs – 0,45 trillion yen (conditional on obtaining authorization in accordance with the Bank of Japan Act)
- J-REITs – 0,05 trillion yen (conditional on obtaining authorization in accordance with the Bank of Japan Act) [1].

On April, 7th, 2011, Bank of Japan considered it to be important to introduce additional operations for financial and credit institutions in disaster areas of Japan. Those operations included offer of long-term funds to satisfy the possible demand of borrowers in disaster areas for recovery and building. Bank of Japan composed the draft scheme and list of acceptable collateral for operations on money markets to support financial potential of credit institutions in disaster areas. According to that scheme, possible partners of the Bank of Japan were appointed. They could be financial institutions which already have offices in disaster areas and already receive funds from the Bank of Japan under general collateral of their offices. Financial cooperatives which did not take part in such partnership had to obtain capital through partner financial institutions. The term “disaster area” is designated under the Disaster Relief Act №118, 1947. Under the scheme the credits were offered under general collateral for one year at the rate 0,1% per year. The planned total sum of credits amounted up to 1 trillion of yen [2].

It is remarkable, that the economy of Japan found itself in a very difficult situation, especially production. Many subcontractors of Japanese automotive giants are located in Tohoku region. Eventually, even such big companies as “Mazda” had to stop their production lines. But a lot of Japanese experts considered it to be a temporal thing as exports somehow increased after the improvement of economic situation in countries which trade with Japan and after the increase of demand on stock.

But in June, 2011, Bank of Japan decided to support the efforts of financial organizations and to focus on their funding without traditional collateral or guarantees. On June, 14th, 2011, Policy Board took decision to open a new credit line to invest in stock and so called financial lending against asset collateral (ABL) [3].

The governance of the Bank of Japan thought, that such measures could support further enhancement of initiatives and efforts of financial and credit legal entities and improve economy growth in Japan. New credit line was allocated for investment in stock and credits without collateral including ABL. Credits were allocated under general collateral approximately for 2 years and could be prolonged only once for general term of 4 years. Annual rate of for that type of lending was 0,1%. Bank of Japan reserved for that credit line 500 billion yen. The minimum sum of investment or credit was 1 million yen. The last date for applications was appointed the last day of 2011 financial year – March, 31st, 2012 [4].

Recovery of the country and its economy after the earthquake turned out to move slower, that it was expected. Some economists as Takahide Kiuchi of “Nomura” considered, that the earthquake and tsunami “had a positive effect on economy” [5]. That could really provoke the increase of domestic demand in case of building boom in disaster areas (Tohoku), but there were no positive outcomes. Japan needed on recovery after the earthquake 15,5 trillion yen for the next five years.

Japan expected its nuclear power energy to become a prospective export trend to the countries with the same seismic conditions (Turkey, Iran and others). But the “Fukushima 1” tragedy showed, that Japanese nuclear power stations were not so reliable. That is why Japan will probably decrease its programs of development of nuclear power energy in which it has invested enough already. The other reason can be the pressure of Japanese public. Moreover, strong yen decreased the competitiveness of Japanese goods on international markets and the overall economic situation. It is important to outline, that stable strengthening of Japanese yen identified the ugly feature of Japanese business – disgust of rick with deep roots. Cash reserves of Japanese companies are at ever high level, but the demand on credits id suppressed. Two thirds of 70 leading Japanese companies are marked as less risky for investment and lending, than Japan itself judging by the prices on default credit swaps [6]. Under the governance of the new Prime Minister of Japan, Yoshihiko Noda, three currency interventions were done to weaken yen. But there was only a short-time effect.

On August, 4th, 2011, Bank of Japan during the meeting on monetary policy decided to enhance quantitative easing and enlarged the Asset purchase program by 10 trillion yen (to 50 trillion yen), leaving the uncollateralized overnight call rate at the level of 0-0,1%. In September the analysts of the Bank of Japan stated that the crisis of national economy provoked by the earthquake at Tohoku was close to final. The level of production and exports have almost achieved the levels of February of 2011, and the constraint in financial sphere significantly decreased except some small companies as their positions were weak [7].

On August, 19th, 2011, the Japanese yen for the first time after the Second World War reached the level of 75,95 yen for 1 USD. That enforced Bank of Japan to hold a meeting of Policy Board on September, 7th, 2011. On this meeting Bank decided to stick to earlier decisions on quantitative easing and to keep the fund for purchase of Japanese Government Bonds and other assets at the level of 50 trillion yen while many experts expected the Bank to enhance the size of the fund for further quantitative easing. At the press conference on September, 7th, 2011, the governor of the Bank of Japan, Masaaki Shirakawa, made a statement, that “decision on quantitative easing was taken at the previous meeting in advance with taking into consideration all the risks which economy may face” [8].

New Prime-Minister had to solve many different problems, such as recovery of economy of Japan and stabilization of government finance. Firstly, it concerns internal debt which already has amounted up to 220% of GDP. From May to June of 2011 the level of unemployment in Japan increased to 4,7%, and the domestic consumption decreased in July, 2011, by 2,1% in comparison with 2010. In June 2011 this parameter was 3,5% [9]. It only provokes deflation trends in economy.

Ex-Prime-Minister of Japan, Naoto Kan, was right stating, that Japan does not have any chance to balance its budget after 18 consecutive years of primary deficit without increase of incomes [10]. Consumption tax which forms one fifth of all budget incomes will be the first object for discussion. Experts of IMF analyzed, that the increase of this tax from 5 to 15% could provide about 50% of national budget correction. The other part could be compensated by reforms restricting the subsidies, especially in area of social security, and the enlargement of the base of the tax on personal income. Administration of new Prime-Minister plans to increase tax revenues by more than 10 trillion yen and to decrease state expenses by 5 trillion yen [11]. Yoshihiko Noda did the “dirty work” by establishing the Commission on tax system research, which was headed by former Minister of Finance, Hirohisa Fujii.

The unusual trend for Japan was the revival of demand on government bonds from the side of Japanese citizens for the reason of the increase of their yield. There three types of government bonds for sale to Japanese residents: with maturity of 3, 5 and 10 years. Interest rates on government bonds with maturity 3 and 5 years are fixed. The interest rates on GB with maturity of 10 years are reviewed every 6 months. Ministry of Finance changed the calculation method of variable interest rate for this type of bonds. According to new system, the basic interest rate is multiplied by 0,66 for bonds starting in July 2011. The basic rate for bonds with maturity of 10 years issued in July 2011 amounted up to 1,17% while the interest rate for individual investors amounted up to 0,77% (before July 2011 it was 0,37%). For bonds with maturity of 3 and 5 years issued in July 2011 interest rates were 0,2% and 0,41% accordingly. In April 2011 sales of bonds with maturity of 10 years amounted up to 10-20% of all sales of government bonds of “Nomura Securities Co.” to citizens. In July 2011 those sales increased to 60%. According to the statistics of the Ministry of Finance, in June 2011 sales of that type of bonds were 231,9 billion yen (that is 18 times more, than in April [12]). It shows the intention of Japanese fiscal authorities to use the mechanism of internal debt further to increase budget incomes taking into consideration Japanese national character features – to save and to invest). But it also signals about some kind of despair in search of solving accumulated state finance problems.

Investment climate in Japan after the disaster in March, 2011 is rather bad. For example, in the beginning of September of 2011 Ministry of Japan has done the research of corporate finance reports that showed the media for corporate investment is on a low level and private investments of non-residents decreased by 0,9% [13].

Bad trend for the country is that strong yen pushes out Japanese companies out of the country. Including the high rates on electricity that was caused by the crisis in nuclear sphere their overall costs have increased. That is why small and medium business started searching new production sites in neighbor Asian countries. Before the main foreign production base for Japan was China. But nowadays politically and economically strong neighbor frightens Japanese business. Now Japanese companies choose such countries as Vietnam and South Korea. According to JETRO, starting from 2009 they observe the growth of inquires about investing outside of Japan. From April till July 2011 the volume of consultations on this point increased by 32%. The inquires about investing in South Korea have tripled. Inquires about Thailand and Malaysia increased by 2,7 times, about Vietnam – by 1,5 times. Inquires come from small companies involved in production of transport equipment, chemistry and IT [14].

In the end of 2011 Japan started negotiations on Trans-Pacific Partnership (TPP), which may be some kind of alternative to APEC. The Partnership must become the base for the zone of free trade in Asia-Pacific region. But in Japan there are different opinions on expediency of participation in TPP. The stability of Japanese companies involved in medicine, finance and post services may become questionable in case Japan enters TPP. The state system of health insurance may go bankrupt because of entering the market foreign competitors which are oriented only on profit. Japan will have to open more its financial sphere for foreign competitors while the representatives of government say, that it was liberalized enough and nothing will affect it after the entering TPP. Japanese are frightened by possible in-flow of foreign specialists, particularly doctors and lawyers. Japan will also have to low the security standards for imported foods [15].

Conclusion: the year 2011 turned out to be difficult for Japan because of the disaster which affected greatly all spheres of economical and social life of the country. But Japan actively liquidated the effects of it and was searching for way out of economic situation. Taking into consideration the above mentioned facts, Japan as usual is not ready for risky experiments and decisions in its economy, that enlarges deflation processes and does not help to revive economic activity

5. Financial Times, September, 9th, 2011
6. Financial Times, August, 28th, 2011
9. Financial Times, August, 30th, 2011
10. Financial Times, August, 30th, 2011
11. Asahi Shimbun, September, 9th, 2010
12. The Yomiuri Shimbun, September, 24th, 2011
13. Financial Times, September, 9th, 2011
14. The Asahi Shimbun, November, 11th, 2011
15. The Yomiuri Shimbun, November, 29th, 2011

Senina Daria N., Junior Research Fellow Institute of Far-East Studies RAS
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