Moody's Warns That Japanese Recession Could Warrant Stimulus

TOKYO (Leika Kihara) - Japan's return to recession and a bigger-than-expected slump in first-quarter economic growth are negative for its credit rating, Moody's Investors Service said, warning that a delay in recovery could warrant additional fiscal and monetary stimulus.

The triple blow of the March earthquake, tsunami and nuclear crisis has nudged Japan into recession and led to a surprisingly deep 0.9 percent contraction in January-March, which Moody's said was negative for Japan's rating and made it increasingly urgent for Prime Minister Naoto Kan to compile a second extra budget.

"Reconstruction and relief expenditures will eventually lead to a rebound in economic growth later this year and in 2012," Moody's said in a statement on Monday.

"But the scale of the loss in output and income caused by the earthquake may already have lowered the future growth trajectory of the Japanese economy, thwarting Japan's long-term growth rate, which is currently around 1 percent," it said.

While the shock from power shortages will be temporary, the risk of Japanese companies permanently losing global market share due to current supply chain disruptions is more damaging, Moody's said.

"Should the rebound in Japan's economy be weaker than forecast or delayed entirely, additional actions by both the Ministry of Finance and Bank of Japan may be needed," the ratings agency said in a statement.

Japan is facing its worst crisis since World War Two after the magnitude 9.0 earthquake and a deadly tsunami battered its northeast coast on March 11, leaving about 25,000 dead or missing and crippling a nuclear power plant.

The economy shrank in January-March at nearly double the pace forecast by markets and is expected to contract again in the second quarter as supply chain disruptions and power shortages hit factory output.

ADDITIONAL ACTION

The Bank of Japan eased monetary policy days after the quake but has stood pat since then on the view -- shared by many economists -- that growth will pick up from around autumn when supply constraints ease.

But the central bank has expressed its readiness to ease policy further if the damage from the quake is bigger than expected and threatens Japan's return to a moderate recovery.

The government, for its part, passed through parliament a 4 trillion yen ($48 billion) first emergency budget for immediate disaster relief and is now eyeing a second extra budget for reconstruction, which Moody's said will "likely need to be much larger than the first one."

Kan has signaled that the second extra budget would be quite big, while Economics Minister Kaoru Yosano said reconstruction may cost up to 15 trillion yen.

But any progress in compiling the second extra budget would be slow as Kan needs cooperation from opposition parties, which control the upper house, to pass necessary legislation through parliament.

Another uncertainty overshadowing Japan's fiscal outlook is the extent to which the government will share the burden of Tokyo Electric Power's (9501.T) rising quake-related liabilities, Moody's said.

Japan's public debt, at double the size of its $5 trillion economy, is the biggest among major industrialized economies, limiting room for additional fiscal stimulus and triggering warnings from ratings agencies.

But lawmakers are hesitant about raising taxes, particularly the politically sensitive sales tax, for fear of scaring voters away, even as the cost of quake reconstruction adds to the heavy burden of spending for social welfare in a rapidly aging society.

Moody's warned in February that it might cut Japan's Aa2 rating -- its third highest rating -- if the government fell short of crafting comprehensive tax reform to fix the country's tattered finances.

($1 = 81.710 Japanese Yen)

(Editing by Michael Watson and Edmund Klamann)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[FogBelter]

05:21 PM on 05/23/2011

I think that Japan, China, the EU, and the US are all looking at new rounds of stimulus spending because there is no recovery taking place. This issues afflicting the global economy are systemic in nature and none of the big players have the spine to restructure the regulatory schemes in such a way as to put economic recovery back on track. In short, there should have been a lot more pain for investors in 2008, and Wall Street and the Banks should have been reigned in but weren't. We are looking at another crash in the not too distant future and the Central Banks lacking tools of intervention to correct the situation.

With what is looming on the horizon, if Governments don't come up with meaningful stimulus in the near future, one that creates jobs and forgets tax cuts for corporations that just pocket cash and don't deliver the jobs, then we are decades from recovery rather than years. Japan, as example, never recovered economically from the Kobe Earthquake of 1995.

So, in this economic climate, further stimulus is going to be needed across the globe.

[ectullis]

12:20 PM on 05/23/2011

Transfer some or all of the money we give Pakistan to Japan. The japanese have more integrity in their little finger than all of the Pakistanies combined.

[Kenz300]

11:23 AM on 05/23/2011

Japan will need to bail out TEPCO. This nuclear disaster id far from over. The costs to the country will go on FOREVER. The poisoned air, land, water and food and all the displaced people will be on going costs. The costs to seal and store the nuclear waste FOREVER can not be calculated.

The earth quake and Tsunami were bad enough. This Nuclear disaster makes everything 1000 times worse. Nuclear energy is too costly and too dangerous.

[OMVCO]

10:43 AM on 05/23/2011

shouldn't be a surprise...