Japan keeps economic view intact, lowers assessment of inflation

Tokyo

JAPAN'S government kept its assessment of the economy unchanged in August but offered a slightly more downbeat view on consumer inflation than last month, as prices slid on weak household spending and the strong yen pushed down import costs.

The government left unchanged its assessment that exports and factory output were flat, as well as its view that household spending was moving sideways on static consumer sentiment. "Japan's economy continues to recover moderately, though weakness in some areas can be seen recently," the Cabinet Office said in a monthly report for August released on Wednesday. The assessment was unchanged from last month.

The report also said consumer prices were "flat", a gloomier view than last month when it said price rises were slowing.

The last time the government used the word "flat" to describe consumer inflation was in April 2015, when the economy was still reeling from the hit to consumption from a sales tax hike implemented in April 2014.

The report offered a brighter view on public investment to say it was holding firm, reflecting increased public works spending from government measures to prop up the economy. In July, the report said public investment was falling gradually.

Japan's economic growth ground to a halt in April-June and analysts expect any rebound in the current quarter to be modest, as weak global growth and the yen's 20 per cent rise against the dollar so far this year hurt exports and capital expenditure.

Renewed yen gains and weak consumption have also weighed on inflation. Core consumer prices fell 0.5 per cent in June from a year earlier, marking the biggest annual decline since 2013, keeping the Bank of Japan (BOJ) under pressure to expand stimulus to achieve its 2 per cent inflation target.

Markets are simmering with speculation that the BOJ will ease monetary policy at its next rate review in September, when it conducts a comprehensive review of the effects of its existing stimulus programme.

Japan's Finance Minister Taro Aso stood by the government's target to return to a primary surplus in fiscal 2020, but fiscal discipline is in doubt after the government approved an extra budget that raises spending to the highest in three years.

Mr Aso spoke to reporters after the Cabinet approved a US$33 billion supplementary budget that is mostly financed by bonds earmarked for construction projects to help fund Prime Minister Shinzo Abe's multi-year economic stimulus package.

The 3.287 trillion yen (S$44.3 billion) budget, the second supplementary budget for the fiscal year that started in April, includes issuance of 2.75 trillion yen in so-called construction bonds, a statement from the finance ministry showed.

Mr Abe has shifted his economic policy to focus on building infrastructure across the country, but some economists worry that the government is losing appetite for fiscal discipline.

"There's no change to our thinking," Mr Aso said. "We're focused on achieving a primary budget surplus in fiscal 2020." The extra budget will raise spending for the current fiscal year to 100 trillion yen, the highest in three years.

The extra budget approved on Wednesday covers only part of a multi-year stimulus package approved by the Cabinet on Aug 2.

The stimulus package has a headline figure of 28.1 trillion yen, including 7.5 trillion yen in combined spending by the national and local governments.

The money will be spent on improving the railway network, upgrading ports, shoring up areas prone to natural disaster and improving wages for daycare workers.

The government was able to offset some of the costs of the extra budget due to a 417.5 billion-yen decline in debt servicing costs. The government also used 410.0 billion yen in funds left over from an earthquake relief package compiled earlier this year.

Some economists have warned against further government stimulus because Japan's public debt burden is already the worst among advanced countries, at twice the gross domestic product.

However, advisers close to Mr Abe have argued that tax revenue will increase if stimulus spending leads to higher nominal growth, so the government should not worry too much about deficit spending in the short term. REUTERS