Japan Slashes Growth Forecast to 1.3% on Housing Woes

Japan's government slashed its economic growth forecast after stricter rules for obtaining building permits caused housing starts to plummet to a four- decade low.

The world's second-biggest economy will probably grow 1.3 percent in the year ending March 31, slower than a previous forecast of 2.1 percent, the Cabinet Office said in Tokyo today. The government predicts a 2 percent expansion the following year.

Slower growth may cause tax revenue to decline, making it more difficult for the government to eliminate the deficit and curb the world's largest public debt. The Finance Ministry will release its budget proposal for next fiscal year overnight.

The more the economy loses steam, the more difficulty the government will have in stoking economic growth through policy measures, said Takahira Ogawa, director of sovereign ratings at Standard and Poor's in Singapore.

Revenue from taxes could start falling, Economic and Fiscal Policy Minister Hiroko Ota said in Tokyo after the forecasts were published. Finance Minister Fukushiro Nukaga told reporters the government still wants to balance the budget by the year ending March 2012.

Government spending is likely to increase to 83.2 trillion yen ($734 billion) in the year starting April 1, the Nikkei newspaper reported on Dec. 16, as an aging population swells social welfare costs.

Sales Tax

Japan's debt will remain at 1.8 times the size of the economy as discussions on raising the nation's sales tax are likely to be delayed, Fitch Ratings said last week. The ruling Liberal Democratic Party and New Komeito last week released a proposal that excluded any mention of when, or how much, the country's 5 percent sales tax might increase.

The proposal of the coalition parties clearly mentioned it will drastically reform the tax system, Nukaga said today. In that environment, we need to stick with our efforts to achieve a primary balance.

The building slowdown will erase 0.6 percentage point from growth, the Cabinet Office said. That's the equivalent of about 3 trillion yen ($26 billion) of GDP, or the same size as Sri Lanka's economy, Bloomberg data show.

Housing starts plunged 35 percent in October and 44 percent in September because the regulations, introduced after an architect fabricated earthquake-resistance data in 2005 to cut costs, caused a logjam in building applications.

Prime Minister Yasuo Fukuda said he regrets the results of the changes to the building code, Chief Cabinet Secretary Nobutaka Machimura told reporters today.

`Bad Preparation'

The instruction manual describing the permit process was issued six weeks after the rules were introduced on June 20. Ota this week called the lapse a case of bad preparation.

Pent-up demand will help housing investment rebound next fiscal year, adding 0.4 percentage point to growth, the Cabinet Office said. The government yesterday said housing construction has almost stopped decreasing.

Spending by households is likely to remain sluggish next fiscal year because companies aren't increasing wages, Ota said.

Japan's gradual recovery hasn't been enough to push up wages and we can't expect a large improvement in consumer spending, she said. Stalled wage growth is a major reason why Japan hasn't been able to shake off deflation.

The GDP deflator, a broad measure of price changes, will rise for the first time in 11 years in the period starting April 1, the government said in today's report. The Cabinet Office predicted, incorrectly, in each of the past two years that the GDP deflator would rise.

Source - Bloomberg