Japan's government today cut its economic forecasts, saying gross domestic product would shrink 3.3 per cent over the next year, and a senior ruling party official said further stimulus would be needed.
The cabinet formally approved a record 15.4 trillion yen ($159 billion) stimulus plan, largely funded by new bonds - with market players warning sliding tax revenue and more stimulus spending would mean even more bond issuance.
“We need measures to support the economy for the long term,” Hiroyuki Sonoda, the acting policy council chairman for the ruling Liberal Democratic Party told a seminar in Tokyo.
The government plans to sell 16.9 trillion yen in additional bonds, raising total issuance 13 per cent to 149 trillion yen, prompting a greatly increased bond auction programme.
The increase means the sale of new bonds almost matches tax revenue in the core government budget, official figures show.
Government officials warned that even their new forecasts came with substantial downside risks, reinforcing expectations for another stimulus package and more bonds.
“It will be a closely watched event toward the year-end,” said Tatsuo Ichikawa, a fixed-income strategist at RBS Securities.
“Although it is not a major factor in the market right now, there's a vague sense of anxiety about additional JGB issuance.”
June 10-year JGB futures fell 0.55 point to 136.60, pulling back from a three-week high last week as traders cited a rise in short positions on fears of more issuance.
The global financial crisis has pummelled demand for Japan's cars, technology and other exports, leaving it facing its worst recession since World War Two.
March trade figures showed exports may be stabilising, but at levels only around half that of a year earlier as the IMF predicts the world economy will suffer its deepest contraction in half a century.
Private sector economists and the central bank were already forecasting a sharp contraction in the economy this year, and the new forecasts brought the government outlook more into line.
Driving the contraction are sliding industrial production and exports. The government now sees industrial production falling 23.4 per cent in the year to next March, much deeper than its previous forecast for a 4.8 per cent drop.