Shirakawa Sees ‘Mild Recovery’ in Japanese Economy
Bank of Japan Governor Masaaki Shirakawa said the economy is likely to experience a “mild recovery” as exports and production improve, though the outlook remains fraught with “considerable uncertainties.”
“The sharp decline in economic and financial conditions in Japan and abroad since last autumn is starting to level out, and there is a prospect of a mild recovery ahead,” Shirakawa said today in a speech in Kanazawa, central Japan.
Shirakawa said “severe economic conditions” will continue as the world adjusts from an excess of debt and consumption built up during the mid-2000s, a period marked by low inflation and interest rates. The central bank raised its view of the economy last week for the first time since July 2006, on signs that a record contraction last quarter represented the worst of the recession.
“Although Shirakawa recognizes some improvement in the economy, he thinks a recovery will be weak,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo. Kumano said the governor wants to signal it’s too early for the bank to consider unwinding its policy of buying corporate and government debt and holding interest rates near zero percent.
Shirakawa said that the recovery in Japan “will inevitably be mild and attended by high uncertainty.” Spending by companies and consumers “is likely to continue to weaken” as profits and wages slump, he said.
Worst Since 1955
Gross domestic product shrank at an annualized 15.2 percent pace in the first quarter, the biggest decline since records began in 1955, as exports and production collapsed.
The economy will resume growing this quarter as companies replenish inventories, Shirakawa said at a news conference after the speech, without giving figures. He said the key question for the board is how much spending picks up once companies replace stockpiles and he’s “cautious rather than optimistic” about the outlook for demand credit scores.
The U.S. and European housing markets are gradually improving and savings rates of Americans have started to rise, “indicating that there is progress toward reducing excesses in consumption and debt,” the governor said. Still, he added, any global rebound may be short lived, highlighting Japan’s experience during the 1990s, when “only mild economic recoveries were realized until the adjustments of excesses were completed.”
‘Prerequisite’
“In order for the economy to start a full-fledged and autonomous recovery, completion of adjustments of excesses and a firm footing toward the restructuring of the financial system is a prerequisite,” he said.
Shirakawa said other central banks haven’t lowered their interest rates all the way to zero percent because they’re “aware of the side effects.” He has said cutting borrowing costs to zero would make money market trading unprofitable, squeezing the flow of funds in the economy.
Since cutting the overnight lending rate to 0.1 percent on in December, the central bank has begun buying commercial paper and corporate bonds from lenders in an effort to channel cash to companies. In March, it increased its monthly purchases of government bonds to 1.8 trillion yen ($19 billion) from 1.4 trillion yen.
Shirakawa said companies have found it easier to sell bonds and commercial paper recently.
“The tension in the environment surrounding corporate financing has eased relative to some time ago,” he said. “However, we judge that conditions continue to be severe on the whole given that a large number of firms are reporting that their financial positions are weak.”
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