MARKET MOVER - BNP PARIBAS - Investment Services India

Japan: The Eastern Fiscal Cliff
• Due to its inability to enact deficit-financing
legislation, the government has decided to
suspend for three months the disbursal of
roughly JPY 5trn in expenditure. While this
should have little economic impact, failure to
enact this legislation by December could trigger
more drastic spending cuts of roughly JPY 7trn
(almost 5.7% of GDP) in December.
• To avoid such a disastrous development, debtfinancing
legislation needs to be enacted as
soon as possible, something that will require
some kind of deal with the opposition LDP. And
here, there are two main possibilities.
• The straightforward deal would be to agree to
dissolve the lower house in exchange for
opposition support for the legislation. This would
mean a snap election by year end (or slightly
thereafter, if Prime Minister Yoshihiko Noda
insists on passing a supplementary budget).
• The other option would be for the LDP to make
its cooperation contingent on an agreement to
forswear using such legislation as a political
trump card, something that would benefit the
LDP should it return to power (as seems likely).
This would leave the dissolution of the lower
house at Prime Minister Noda’s discretion,
essentially pushing the general election back to
next summer.
Budgetary disbursement delayed for first time in
postwar era
Non-essential budgetary spending has been
postponed for the first time in the post-war era. The
government has moved to conserve cash, because
the Diet session was drawing to a close (on 8
September) without action being taken on legislation
authorising the issue of deficit-financing bonds. As
almost half of the spending in the general account
budget is covered by deficit-financing bonds, it will be
impossible to implement the budget as planned
without this key legislation. With the fate of the debtfinancing
bill still uncertain owing to the political
stalemate in the divided Diet, there is a risk that the
government could run out of cash by late October.
Consequently, in an effort to tide things over at least
through November, the government on 7 September
decided to conserve cash by suspending for three
months the disbursal of roughly JPY 5trn in spending.
These funds had been destined for (1) administrative
expenses (telephone and photocopying charges,
etc.), (2) subsidies to independent organisations,
such as national universities, (3) tax-revenue grants
to local governments, and (4) transfers to the special
accounts (including the public pension-fund special
account). To limit the impact on people’s lives and
the economy, all essential spending (social welfare,
defence, reconstruction, etc.) will not be affected.
That said, if the debt-financing legislation remains in
limbo, drastic spending cuts will become inevitable,
resulting in a partial shutdown of government. And
this would have serious ramifications for the
economy and daily life.
US faced government shutdown risk last summer
While one might shudder at the idea of a government
shutdown, it is worth remembering that the US faced
a similar risk last July because of the debt-ceiling
crisis. As in Japan, the US federal budget and the
amount the government can borrow to service the
budget deficits (debt ceiling) are agreed separately.
Congressional authorisation is required whenever the
debt ceiling is raised. In the US, where control of
Congress can often be divided between government
and opposition, negotiations on raising the debt
ceiling ran into difficulty when Democrat and
Republican views on fiscal affairs collided. And for a
while, there was a growing risk that an agreement
might not be reached, which could have resulted not
only in the delayed disbursement of social security
benefits and other payments, but also sovereign
default. While an accord was reached at the eleventh
hour, financial markets were destabilised for a while.
Little economic impact from delaying JPY 5trn
Getting back to Japan, the recent decision to save
roughly JPY 5trn basically involves the delayed
disbursal of funds, though there also is the possibility
that some of this spending might be eliminated
altogether. The targeted administrative expenses and
subsidies to independent organisations could be
axed. Together, this could save the government
roughly JPY 600bn, a fairly insignificant amount in
macro terms (ultimately, we suspect little spending
will actually be cut). The lion’s share of the spending
delays come from transfers to the special accounts
(JPY 2.3trn) and tax-revenue grants to local
government (JPY 2.1trn), which cannot be cut.
Accordingly, as these disbursements will only be
delayed for three months and duly paid out from
December, the economic impact, when averaged out
over the full period, should be pretty neutral.
Ryutaro Kono/ Makoto Watanabe 20 September 2012
Market Mover
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