Market Overview

Japan's GDP Shrinks Ahead of Election

Japan's July-September quarter GDP turned in its worst performance since the period immediately following last year's devastating earthquake. Real GDP fell at an annual rate of 3.5 percent during the quarter, according to figures released by the Cabinet Office today. “Shipments to Asia, Europe and the U.S. all slid, as did capital spending,” Bloomberg reported.

The sharp decline of exports to China as a territorial dispute resulted in calls for a boycott of Japanese products by Chinese consumers was reflected in the final month of the quarter.

In Japan itself, consumption fell for the second straight quarter—the first time that has happened since 2009—as the government ended its program of subsidies for the purchase of fuel-efficient cars. Capital spending also fell as corporations became more pessimistic about the future.

Today's GDP data was bad news for Prime Minister Yoshihiko Noda, who is under pressure to call a Lower House election before year-end. “'The GDP figures were grim,' Noda said in parliament after the data release, as he pledged to instill a ‘sense of urgency' in his government's economic policy,” Bloomberg said.

Economic prospects during the July-September quarter were complicated by Japan's own “fiscal cliff.” Japanese law requires that the Diet specifically ratify deficit spending before any deficit funding can take place. Normally, this is like raising the debt ceiling in the U.S.—a routine, non-controversial vote in Congress to approve the increase.

But, this year, the major opposition parties in Japan have refused to go along with the deficit spending authorization until Prime Minister Noda sets the date for a Lower House election. If the government cannot issue new deficit bonds, then it will run out of money. About 40 percent of Japan's annual budget is funded through deficit spending. The government has just about reached the limit of what it can spend without issuing new deficit bonds.

The opposition parties want the prime minister to dissolve the Diet and hold elections before the end of this year. The opposition wants the next election to be a referendum on some of Noda's more controversial policies.

These include plans to raise Japan's consumption tax (a value-added or sales tax) from 5 to 10 percent in stages over the next several years. Noda has also taken a stand in favor of joining the U.S.-sponsored Trans-Pacific Partnership (TPP), which would establish a free trade zone between the United States and a number of Pacific Rim countries, including Japan, South Korea, Singapore and Chile.

The TPP is very controversial in Japan, partly because it would require the complete liberalization of Japan's agricultural markets. But TPP would also require equal access to all markets in each participating country, including financial services and other areas where the U.S. might be dominant. The advantage in joining TPP for Japan is that it would offset the bilateral free trade agreement between South Korea and the U.S., signed in 2011, giving Japan the same access to U.S. markets already enjoyed by South Korea.

“Major newspapers said on Saturday that support was building in the Noda administration to announce Japan's entry into the proposed American-led regional agreement sometime in the next two months,” The New York Times reported. “The reports said that move would be immediately followed by a decision to dissolve Parliament for national elections that would take place a month later. “

All of this is coming at a time of heightened political turmoil in Japan. Noda's party, the Democratic Party of Japan (DPJ), is falling apart as members fearful of losing their seats in the next election flee to several opposition parties, including a new, conservative-nationalist party that is being put together by former Tokyo governor, Shintaro Ishihara.

While Noda's DPJ retains a slim majority in the Lower House, it is already in the minority in the Upper House. This makes it more difficult to pass controversial legislation, including this year's deficit spending authorization.

Earlier today, the DPJ and the two major opposition parties, the Liberal Democratic Party (LDP) and the Komeito, agreed with Prime Minister Noda to combine the deficit authorization bill with the budget to avoid this kind of harmful political haggling in the future. It is expected that a bill authorizing deficit spending through the year ending March 31, 2016 will be passed over the next week or so, putting an end to Japan's fiscal cliff for the time being.

Noda has not yet indicated when he will call an election but the fact that the opposition parties ended their blockade of the deficit authorization bill would seem to indicate that some deal has been struck.

In the meantime, several voter polls conducted by Japan's major news organizations show support for the Noda government is at new lows, making the decision to call an election even more difficult.

Posted-In: Prime Minister Yoshihiko Noda Shintaro IshiharaNews Politics Global Markets General Best of Benzinga

 

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