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Main message: Anticipating a greater likelihood of policy
change under the new administration, we lower our
economic forecast for F3/10 and raise that for F3/11. The
changes come because we assume fiscal resources freed
up by the partial freeze on supplementary F3/10 budget
spending will be diverted to child allowances (¥2.7trn) in the
initial budget for F3/11. We also provide a forecast for F3/12
here (see top right).
What’s new: Likelihood of a freeze on some public works
expenditure in the F3/10 supplementary budget under the
new DPJ administration has risen. We think the funds would
be channeled instead into income support in F3/11, but a
negative effect on GDP would show up first due to the policy
timing lag. Suspension of the provisional gasoline tax
surcharge will also widen price declines in F3/11, aligning
deflation closely with the BoJ’s outlook, which so far has
been the most pessimistic in the market.
Market implications: Bringing forward the point at which
policy-induced demand wanes into F3/10 is negative for
asset markets, but we think immediate downside risk will be
limited as it may now be possible to shore up household
spending in F3/11 without raising taxes. We also foresee
similar tailwinds for global asset markets, like Japan in 1999,
from (1) stabilization of the financial system via public
capitalization, (2) massive fiscal stimulus, and (3) an
accommodative financial environment due to loose
monetary policy and extension of credit guarantee
programs.
Risks: The upside risk is that Japan’s economy may avoid
leveling off as fiscal stimulus and monetary easing lead to
positive feedback from domestic and overseas asset markets.
The downside risk is that tougher regulation of financial
institutions will crimp overall demand.
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