News and Finance

Japan’s economy is far from achieving self-sustained growth as the export-led recovery fails to spur spending at home, according to Kazuo Momma, the Bank of Japan’s top economist.

“The risk that the Japanese economy will fall off from a cliff is small, but there is still a long way to go,” before the expansion becomes sustainable, Momma said in Tokyo today. “Even if the global economy continues to recover, the spread of that to capital spending and the labor market will be limited.”

More than $2 trillion in global stimulus spurred demand for Japanese exports last year, helping pull the nation out of its worst postwar recession. Momma said there’s no “magic” solution to stamp out deflation and that overcoming price declines is the central bank’s top priority, echoing remarks made by Governor Masaaki Shirakawa last week.

“Japan’s economy can probably avert a double-dip slump, but the pace of expansion won’t gather momentum as deflation lingers,” Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, said before Momma’s speech.

Since lowering its benchmark interest rate to 0.1 percent in December 2008, the central bank has increased its purchases of government bonds and made it easier for companies to obtain funds. It unveiled a 10 trillion yen ($111 billion) lending program for commercial lenders in December, a facility Shirakawa has said the bank can expand if necessary.

Momma said capital spending won’t show signs of a clear rebound until the year starting April 2011. Companies “remain under pressure” to fire workers, underscoring the weakness of domestic demand, he said in a speech at the Japan National Press Club.

Record Drop

Core consumer prices, which exclude fresh food and are the central bank’s preferred measure of inflation, slid 1.3 percent in December. Prices minus food and energy, which economists say reflect the trend of prices more accurately, dropped a record 1.2 percent.

“Data underscores that deflation is entrenched in the Japanese economy,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. Ueno doesn’t expect the central bank to raise rates until July 2011 at the earliest.

Bank of Japan board members last week affirmed their forecasts that they expect prices will keep falling through the year ending March 2012, the third consecutive year of declines.

“As for beating deflation, there are no concrete policies with which we can do one or two things and be able to resolve all problems at once,” Momma said. “We would have taken those steps already if they existed.”

Momma said the global economy is recovering, though many countries continue to struggle with high unemployment, which poses a risk to the outlook. Such uncertainties could spur market volatility, and policy makers need to monitor developments until the global recovery gains stability, he said.

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