Joanna
uvj at vsnl.com wrote:
>Business Standard
>
>Friday, June 25, 2004
>
>Japan recovery threatened: S&P
>
>David Pilling & Barney Jopson / Tokyo June 24, 2004
>
>As Japan pulls out of deflation it faces risks from
>higher interest rates and rising public debt that could jeopardise its
>chances of a smooth recovery, the head of Asia-Pacific sovereign ratings at
>Standard and Poor's (S&P) said yesterday.
>
>Takahira Ogawa, in an interview with the Financial
>Times, said he welcomed signs that deflation appeared to be in its last
>throes and that the economy was mounting a recovery thanks to structural as
>well as cyclical factors. However, he said there were dangers for the
>economy as it made the transition from deflation to inflation.
>
>"Every step of improvement has a negative effect,"
>he said. "This is a very difficult period to foresee, whether the future is
>brighter or gloomier."
>
>In March, S&P upgraded its outlook on Japan's
>sovereign debt but kept its long-term sovereign rating at AA-, the worst of
>the Group of Seven countries.
>
>Commenting on the recent sharp rise in long-term
>interest rates, Ogawa said, "There's a potential risk that if interest rates
>go up too fast before the macro- economic conditions become firmly in better
>shape it will have a negative effect on the economy."
>
>In the past month, yields on 10-year government
>bonds have risen sharply, from 1.46 per cent to 1.84 per cent. This has
>prompted contrasting reactions from government ministers with some pointing
>out the dangers of volatility and others attributing rising yields solely to
>the economy's improved outlook.
>
>Ogawa said a sustained rise would complicate the
>government's ability to meet its huge borrowing requirements. In a
>deflationary environment, he said, the central bank had a strong incentive
>to buy long-term government debt as a tool of monetary policy.
>
>As deflation eased, however, the Bank of Japan (BoJ)
>would have less reason to buy government debt, issuance of which, including
>rollovers, was set to rise from ¥130,000 billion a year to more than
>¥170,000 billion ($1,600 billion, ?1,300 billion, £860 billion) he said.
>
> "When the BoJ changes monetary policy it will have
>no official reason to buy long-term government bonds but by that time the
>government will be desperate."
>
> S&P will be watching for progress on closing the
>fiscal deficit, running at almost 8 per cent of gross domestic product
>annually. Gross debt is about 140 per cent of GDP, with nearly half of all
>government spending financed by borrowing.
>
>Ogawa said Japan should move swiftly to close the
>fiscal gap as the economy improved, although he acknowledged the potential
>risk of choking off growth.
>
>"This is a Catch 22," he said. "But when it comes to
>increasing tax, or cutting expenditure, Japan does not have the luxury to
>decide which to do first. It needs a combination."
>
>He added, "Ideally, if Junichiro Koizumi (the prime
>minister) had more charisma or more guts, he should tell the nation, 'We can
>'t keep on going like this.' The size of the debt outstanding is snowballing
>and the cost the nation will have to bear will be greater."
>
>Ogawa said that, paradoxically, as the economy
>improved the risk of bankruptcies would also rise. That was because
>companies that could service debts at near-zero interest rates might
>struggle as rates rose. "Higher rates create pluses and minuses," he said.
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