Despite encouraging signs of renewed business confidence among companies, the new government still faces a crucial test: its ability to get the domestic economy back on the path to recovery.
Despite encouraging signs of renewed business confidence among companies, the government still faces a crucial test: its ability to get the domestic economy back on the path to recovery.
A lot hinges on when it will pass the third supplementary budget for fiscal 2011.
The Bank of Japan's Tankan survey for September, released Oct. 3, brought some good news. The diffusion index for large manufacturers rose to 2 for the first positive reading in two quarters.
But analysts, citing the EU sovereign debt crisis, a slumping U.S. economy and historic highs in yen-dollar-euro exchange rates, say Japan could still stumble in its efforts to achieve economic recovery.
These issues aside, they say the extra budget aimed at financing rebuilding from the March 11 earthquake and tsunami will hold the key.
The government and business circles are pinning their hopes on the 12 trillion yen ($156.4 billion) package to pump up lackluster domestic demand.
Although the government and the ruling Democratic Party of Japan settled the budget request on Sept. 27, the opposition camp has yet to give its blessings to the proposals.
The government had initially hoped to reach agreement by the end of September.
But the main opposition Liberal Democratic Party and its allies are firmly against a proposal to raise tobacco taxes and sell all shares held by the government in Japan Tobacco Inc. to help finance rebuilding efforts.
The government is hoping to submit the third extra budget and proposed legislation for tax hikes this month. But these efforts could stall, depending on the outcome of talks between the ruling coalition and opposition parties.
A Cabinet Office study in August estimated that the growth rate of Japan's gross domestic product in real terms will increase in the latter half of 2011.
Even if tax hikes worth 10 trillion yen are implemented for 10 years, the growth rate is projected to be 2.9 percent in fiscal 2012.
Analysts said calls could grow for another supplementary budget if the government's plan to raise taxes just as business sentiment is picking up backfires and fails to kick-start the economy or the EU debt crisis deepens.
Meanwhile, the central bank breathed a sigh of relief after the latest Tankan survey pointed to improved business confidence among companies.
The BOJ was weighing additional monetary easing measures at its Monetary Policy meeting slated for Oct. 6-7 if the latest survey showed a significant drop in business confidence.
The bank is still keeping that option open to prepare for a recurrence of the financial crisis triggered by the collapse of Lehman Brothers.
With improved readings, the bank is expected to continue with its current monetary policy.
(This article was written by Toru Hatanaka and Masahiro Yuchi.)