Abe Cabinet sets sights on deflation

Before officially taking office, newly elected Prime Minister Shinzo Abe succeeded in driving the yen down and boosting stock prices by urging the Bank of Japan to take drastic monetary-easing measures and expressing his stance of active government spending.

The new administration, which aims to take all possible measures to stem the yen's rise and overcome deflation, will compile a new fiscal 2012 supplementary budget and has expressed its intention to intervene into foreign exchange markets if necessary.

However, it remains to be seen whether the policies can be effective, as the government tries to fend off criticism that they are dole-out policies.

Abe told Taro Aso, the finance minister and state minister for financial services, on Wednesday to "proceed with all possible efforts" on behalf of the government to reach a policy accord with the Bank of Japan.

The accord will introduce major changes to the central bank's monetary policies including setting a new inflation target of 2 per cent.

Abe also asked Aso to take such measures as yen-selling and dollar-buying market interventions if necessary, and help the public and private sectors coordinate to establish a system to correct the yen's appreciation.

Reacting favourably to Abe's policy stance of drastic monetary easing and positive finance, the yen's value dropped in Tokyo foreign exchange markets Wednesday.

The former administration led by the Democratic Party of Japan had set a goal of recovering the government's fiscal health by imposing a limit of 44 trillion yen in initial budgets on the issuance of new government bonds.

Abe clarified his stance on additional bond issuance at his Cabinet's first meeting Wednesday evening. Speaking about the fiscal 2012 supplementary budget, Abe said: "I'm not firm on the 44 trillion yen cap. My aim is to compile a large [supplementary budget]."

Aso said at a press conference early Thursday, "I'll make flawless preparations for seamless policy actions" including the compilation of the fiscal 2013 budget.

A draft of the supplementary budget centers on disaster prevention and minimizing disaster damage; strengthening the nation's industrial competitiveness; and giving the public a sense of security.

The Abe administration plans to earmark about 10 trillion yen for government spending in the supplementary budget.

Practical projects to be covered include accelerating reconstruction in areas affected by the 2011 Great East Japan Earthquake, and moving up schedules to repair aging roads, bridges and tunnels.

The draft is also expected to include assistance for improving the fiscal and taxation conditions of small and midsize companies, as well as corporate research and development.

Mounting debt

The Abe administration plans to flexibly manage economic and fiscal policies in the next two to three years, opting to prioritize economic stimulus over fiscal discipline.

However, as the outstanding government bond debt is expected to surpass 700 trillion yen in fiscal 2012, the issuance of new bonds for the supplementary budget would worsen the government's already dire fiscal state.

Due to anxiety over further bond issuance, long-term interest rates have been rising as bond prices drop, with the benchmark rate closing on Wednesday at a 2-1/2-year high of 0.785 per cent per annum.

If interest rates continue to increase, those for mortgages and corporate loans will also rise, and repayment burdens of individuals and firms will become even heavier.

With companies' earnings not expected to rise, salaries are also not expected to rise anytime soon. As a result, the policy will likely impose a period of temporary pain on the public.

At the first Cabinet meeting, Abe expressed consideration for fiscal reconstruction goals regarding the fiscal 2013 budget, indicating a stance of maintaining fiscal discipline.

It remains to be seen whether the administration can reduce social security spending by streamlining related government costs, such as by cracking down on illicit receipt of welfare payments.

Concerning energy policies, the Abe administration intends to shift toward renewable energy resources and reduce the nation's dependence on nuclear power.

However, the Liberal Democratic Party and New Komeito plan to allow the restart of idled nuclear power plants one by one, if they meet guidelines to be compiled by the Nuclear Regulation Authority by July.

The NRA on Wednesday presented its final assessment that faults within the grounds of Tohoku Electric Power Co.'s Higashidori nuclear plant in Aomori Prefecture may be active, delaying a restart of the plant.

If other nuclear plants face delays for similar reasons, electricity supply and demand will tighten and power utilities' earnings will further deteriorate. Business circles are expected to urge the administration to take practical actions to avoid such problems.

Regarding participation in negotiations over the Trans-Pacific Partnership free trade agreement, Akira Amari, state minister for economic revitalization, said at a press conference Thursday: "It is not in the nation's interest to join talks predicated on the abolition of all tariffs without exception. The question is whether there are ways [for joining the TPP] to meet national interests."

Depending on how negotiations go between the United States and other countries considering joining the TPP, Amari indicated the government may soon declare its participation in the talks.

Ahead of his summit meeting with US President Barack Obama scheduled in January, Abe said, "I'll make the judgment while keeping in mind the president's remarks."

It will be a point of focus to what extent the government and ruling parties are willing to adjust their opinions in debates leading up to Abe's visit to the United States.