Tepid Economic Growth in Japan

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Consumer Prices Rise in Japan, Suggesting Stronger Growth

TOKYO — Japan’s economy is gaining momentum, data for October showed, with consumer prices excluding food and energy rising 0.3 percent from a year earlier. It was the biggest gain since 1998, but household spending remained tepid as incomes slipped from the same month a year before.

The various indicators released on Friday suggested that the very loose monetary policy and stimulus strategy of Prime Minister Shinzo Abe are helping end Japan’s long bout of deflation.

Industrial output rose 0.5 percent in October, the second monthly advance, driven by increases in the production of machinery used to make computer chips and other industrial products, plastics and cellphones.

The government reported that the core consumer price index, excluding food costs, rose 0.9 percent from the year before. Including both food and energy, prices rose 1.1 percent.

Japan’s jobless rate remained flat in October, though the number of jobs available rose slightly.

Further improvement is expected in November, aided by strength in housing construction and exports.

“Business conditions in the Japanese manufacturing economy improved for the ninth consecutive month and at a rapid pace in November, driven for the most part by an expansion of both foreign and domestic demand,” said Claudia Tillbrooke, an economist at Markit, who compiles its purchasing manager’s index for Japan. That index rose to 55.1 in November, from 54.2 in October. A reading above 50 suggests expansion.

The government and central bank have set a target for attaining a 2 percent inflation rate within two years. So far, economists say, most of the increase in prices has come from a weakening in the Japanese yen, which erodes consumer spending power and increases costs in yen terms for imports of fuel, food and industrial components.

Overall household spending, which accounts for nearly two-thirds of Japan’s economic activity, rose 0.9 percent in October. Excluding housing costs, spending fell 1.5 percent from the month before and 0.3 percent from September. Workers’ incomes fell an average of 1.3 percent in October.

Economic Expansion Slows Down in Japan

TOKYO — Japan’s economic growth slowed in the quarter that ended in June to an annualized rate of 2.6 percent, government data showed Monday, clouding the outlook for the economic policies of Prime Minister Shinzo Abe and raising concerns that he may put off moves to tackle the country’s enormous public debt.

This was the third consecutive quarter of growth for Japan’s gross domestic product of about $5 trillion, the third-largest in the world, after those of the United States and China.

Still, the expansion fell short of analysts’ expectations for Japan, whose economy grew at a robust pace of 3.8 percent in the previous quarter, helped by the Abe government’s monetary and fiscal stimulus drive.

Economists polled by Reuters had expected Japan’s economy to grow at a similarly healthy clip in the April-to-June quarter. But weak capital expenditure, reflecting continued caution among Japanese corporations about the country’s long-term prospects, slowed growth, according to figures released by the Cabinet Office.

Compared with the previous quarter, the Japanese economy grew 0.6 percent.

Private consumption rose a better-than-expected 0.8 percent over the previous quarter, as a brightening mood in Japan pushed up spending on food, travel and luxury products. But capital expenditure fell 0.1 percent, below a market forecast for a 0.7 percent increase.

“Corporations’ cautious attitudes was the main factor limiting growth,” Harumi Taguchi, principal economist at the research firm IHS, said in a note. Companies, he added, “remained hesitant to increase capital expenditure and continued to cut inventory in light of the slow recovery of exports and uncertainty regarding the sustainability of the economic recovery.”

Though export growth slowed in the quarter, shipments were expected to pick up as recovery gathered steam overseas, Mr. Taguchi said, especially in the United States and Europe.

A weaker yen has also assisted Japanese exports.

Less robust growth in China, Japan’s largest trading partner, is a concern. A spat over islands in the East China Sea that are claimed by both countries, has also hurt trade between the two countries.

Signs of slowing growth could strengthen the hand of critics of Mr. Abe’s economic drive, known as Abenomics, which has relied heavily on monetary stimulus and government spending to revive growth in Japan’s long-deflationary economy.

Mr. Abe has promised to follow up with market deregulation and the easing of trade barriers to raise the long-term growth potential.

Weaker growth could also derail Japan’s plans to raise taxes and pare back soaring government debt, which reached ¥1 quadrillion, or $10.3 trillion, in the latest quarter, more than twice the size of its economy.

To start easing that debt burden, the government plans to raise the sales tax to 8 percent next April, from the current level of 5 percent, and to 10 percent in October 2015.

According to government calculations, raising the sales tax could double tax receipts to more than 5 percent of gross domestic product, compared with the current 2 percent to 3 percent.

Whether Japan goes ahead with raising the tax will depend on how sustainable the government deems economic growth to be. Under the current plan, the increase will be implemented if it is likely that the economy can sustain at least 2 percent real G.D.P. growth for the next decade.

Mr. Abe said Monday that he remained confident on Japan’s economic prospects and that he would stay on course with economic overhauls. He has been noncommittal about the consumption tax, however.

“The economy has been steadily rising,” he said at a news conference. “I’ll continue to focus on the economy, implementing further growth strategies in the autumn.”

Some economists warn that raising taxes too soon could derail Japan’s nascent recovery.

“A tightening in fiscal policy would almost certainly snuff out the current cyclical rebound,” Duncan Wooldridge and Silvia Liu, economists at UBS, said in a note to clients before the G.D.P. numbers.

“The desire for fiscal consolidation in the long run must not sacrifice the war on deflation in the short run,” the note continued. “To hike or not to hike the consumption tax is the only policy which matters over the next four quarters.”

Rising Price Index Hints at Rebound in Japan

TOKYO — Japanese consumer prices rose in June at their highest annual pace in nearly five years in an early sign of an end to persistent deflation, boding well for the central bank’s bold stimulus plan to achieve its 2 percent inflation target in two years.

The 0.4 percent rise in core consumer prices, which is slightly higher than a median market forecast for a 0.3 percent increase, was largely because of a rise in electricity bills and a weak yen that inflated the cost of gasoline imports.

But it is an encouraging sign for the Bank of Japan, eager to end 15 years of grinding deflation, because it suggests that more companies are optimistic enough about the economy to believe they can raise prices or at least not cut them.

The data is also a boost to Prime Minister Shinzo Abe’s sweeping pro-growth policies that aim to pull the world’s third largest economy out of stagnation.

Mr. Abe’s government, which is driving an aggressive policy mix of monetary and fiscal stimulus to foster sustainable long-term growth, has already seen positive signs as first-quarter data showed Japan was the fastest-growing major economy in the world.

The increase in the core consumer price index, which excludes fresh food but includes energy costs, was the highest annual pace since a 1 percent rise in November 2008. It is the first time in 14 months that consumer prices have risen. (In May, prices neither rose nor fell.)

Tokyo core C.P.I., a leading indicator of nationwide prices, rose 0.3 percent in July after a 0.2 percent increase in June, matching the median forecast, suggesting prices will continue to rise in the coming months.

The Bank of Japan unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 percent inflation target in roughly two years.

Many analysts expect prices to gradually rise, reflecting improvements in the economy, but they view the two-year time frame for achieving the inflation goal as too ambitious.

Getting Japan to Spend

“Things are generally looking brighter, aren’t they?” Mr. Horii said, as he scrutinized, then dismissed, cheaper alternatives at the bustling Yodobashi Camera electronics store. The Bose ones he has his eye on, which he’ll hook up to his TV, go for about $400.

“I don’t really need it, but I want it,” he said. “A good economy means you can buy things you don’t really need.”

Prime Minister Shinzo Abe’s bid to revive Japan’s deflated economy hinges on consumers like Mr. Horii starting to feel flush enough to start splurging on the finer things in life.

A wide recovery in consumer spending has been the weakest link in “Abenomics,” the bold economic stimulus strategy that Mr. Abe has pushed since taking office in late December.

Abenomics has already brought big profit bumps to the nation’s exporters, thanks to a yen made weaker by Mr. Abe’s aggressive policies. He found a kindred spirit in Haruhiko Kuroda, the Bank of Japan’s new governor, who has committed the central bank to easing the money supply and reinflating the economy. Stock markets have rallied, as foreign investors jumped back into a country they had all but written off for its seemingly unshakable stagnation.

Numbers released on Friday by the government provided more proof of Japan’s corporate recovery. Industrial production rose by a robust 2 percent in May from the previous month. Tokyo’s benchmark Nikkei index climbed 3.5 percent Friday on the strong showing.

Reversing a 15-year-long slide in prices, which Mr. Abe has singled out as both a cause and a symptom of waning profits, wages and consumption, is a tougher order. For companies to feel confident enough to start raising prices, Japan’s consumers have to start spending again, and data confirming that trend is still mixed.

Separate figures released on Friday showed that household spending fell 1.6 percent in May from a year earlier, confounding economists’ expectations of a 1.3 percent rise. Still, for the first time in seven months, Japan’s core consumer prices in May did not fall compared to the previous year, staying flat for that month after falling 0.4 percent the previous month.

“We are comfortable with our view that the uptrend of consumption continues,” Masamichi Adachi, Tokyo-based economist at JPMorgan Securities Japan, said in a note Friday. “An expected rise in summer bonuses, paid in June and July, and improvement in general sentiment are the main reasons,” he said.

There are some signs that after years of penny-pinching, conspicuous spending is on the rise again in Japan. But for now, it is starting at the very top, among the financiers, professionals and other well-to-do Japanese who have benefited from the recent stock market gains.

Sales of Ferrari cars in Japan have jumped almost 20 percent so far this year, figures from the Japan Automobile Importers Association show, thanks to this newfound exuberance among the nation’s rich.

“We’ve seen confidence start to explode over the last months,” said Herbert Appleroth, chief executive of Ferrari Japan. “We’re seeing some of the highest growth in the world here.”

At the Hankyu Umeda department store in Osaka, sales of luxury watches, jewelry and other luxury items are surging, which lifted overall sales in May by 63 percent compared with the previous year, the sixth straight month of double-digit increases.

“Japanese shoppers are tired of cheap,” said Keiji Uchiyama, manager of the marble-floored store, brimming with imported fragrances, pastel macaroons and slick designer bags. “They’ve scrimped for so long, but now they’ve had enough,” he said.

Japan Keeps Monetary Policy Steady

In a unanimous vote, the bank’s board stuck to its strategy of expanding the monetary base at an annual pace of 60 trillion yen to 70 trillion yen, or $586 billion to $684 billion, through purchases of government bonds, commercial debt and other assets.

Haruhiko Kuroda, the bank’s new governor, pledged to “respond flexibly” to the recent moves in Japanese government bond yields, as markets “searched for a new equilibrium.” He stressed that there was no cause for immediate concern.

“Yields are up, but at this stage there is no large impact on the real economy,” Mr. Kuroda said at a news conference after the bank’s decision.

He said that the central bank would continue to make large bond purchases to “keep up the downward pressure on interest rates.” He has also suggested that the bank would adjust the way it bought bonds in the market.

At its first policy meeting under Mr. Kuroda last month, the bank unleashed what analysts have called a “shock and awe” monetary policy, a sea change for a bank that had come to be known in recent years for its caution and conservatism.

Declaring he would do “whatever it takes” to combat falling prices, Mr. Kuroda announced that the bank would seek to double Japan’s monetary base, as well as the bank’s holdings of Japanese government bonds, by the end of 2014.

In recent days, worries have grown about rising interest rates in the government bond market, which could threaten Japan’s monetary policy. Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial asset held by banks, pension funds and insurance companies, making a surge in debt yields perilous.

The scale of Japan’s quantitative easing is striking. Assuming that the Japanese economy grows by 2 percent a year, the Bank of Japan would expand its assets to just under 60 percent of the country’s gross domestic product, according to estimates from CLSA Asia-Pacific Markets.

The assets of the Federal Reserve, which now total about 20 percent of the American economy, and the European Central Bank’s assets, which come to about 28 percent of the euro zone’s G.D.P., pale in comparison.

Japan stands out in another important way. Under Prime Minister Shinzo Abe, who took office in December and has been the main champion of the bank’s new boldness, Japan is coupling its monetary push with heavy government spending.

Barely two months into office, Mr. Abe pushed through an emergency stimulus package of 10 trillion yen, and the Japanese Parliament is expected to pass an initial budget of 92.6 trillion yen for 2013, with heavy spending on public works.

By contrast, the Fed and the European Central Bank have been forced to depend on monetary policy alone to stave off stagnation and bring about an economic recovery. In both the United States and Europe, a significant increase in government spending remains controversial.

Still, critics have pointed to Japan’s skyrocketing public debt as proof that such spending is not sustainable. The latest spending packages, they say, will be the final push that could send Japan plummeting into a Europe-like debt crisis. Defenders of the bank’s monetary policy had argued that Japan’s bold stimulus efforts would not push interest rates higher, because the central bank promises to buy bonds the government issues.

But in recent days, yields have been volatile, with the key 10-year nominal government bond yield hitting five-year highs last week before later settling down. Traders blamed the central bank’s purchases, saying they created a lack of liquidity in bond markets.

“We think Kuroda has done a great job in boosting asset prices by raising asset price inflation expectation, but he now has to calm down the sentiment in bond market,” Masaaki Kanno, chief economist at JPMorgan Securities Japan, said in a research note. “This is quite challenging.”

Strategies: Japan Starts to Recharge After Two Lost Economic Decades

Envious foreigners called its export-driven economy a “miracle.” Its real estate and stock markets seemed to defy gravity, and its financiers were so flush with cash that they bought skyscrapers, golf courses and corporate empires far from Japan’s shores.

Then the bubble burst. In 1990, Japan began more than 20 years of stagnation and deflation. Invest in Japan? For most foreigners, it was wiser to avoid it. At the end of 1989, the Topix, a k a the Tokyo Stock Price index, reached 2,881. Now it’s less than half that.

It’s possible, at least, that those lost decades are finally over. Japanese markets have become turbocharged again, and are beginning to move markets worldwide. This year alone, the Topix has risen more than 22 percent in dollar terms, far exceeding the gain of the Dow Jones industrial average and nearly every other major stock market. The yen has weakened sharply, trading at more than 100 to the dollar for the first time in four years. That exchange rate should make many Japanese companies more profitable and more competitive. It may also inject inflation into the Japanese economy, encouraging consumers to spend and companies to invest.

“What is happening in Japan is revolutionary,” said Mohamed El-Erian, the chief executive of Pimco, one of the world’s largest bond managers. “Nothing they’ve done since the Second World War comes close in terms of economic experimentation,” he said.

It’s far too soon to judge whether “Abenomics” — the new policies of Prime Minister Shinzo Abe and Haruhiko Kuroda, the Bank of Japan governor — will be successful. But they have already begun to change expectations within Japan and around the world.

Most crucially, there are signs that the policies may be breaking Japan’s debilitating spiral of deflation. In April, Mr. Kuroda declared that Japan would achieve an inflation target of 2 percent within two years — an ambitious goal that he said he would achieve by doubling the country’s monetary base.

The central bank, which has already been holding short-term interest rates near zero, is making direct purchases of long-term bonds and other securities. That program of quantitative easing is enormous, Mr. El-Erian said: “It is much bigger than the Federal Reserve’s in the United States, when you consider the size of the two economies.”

Is the new monetary policy working? It hasn’t been in place long, and no up-to-date inflation data is yet in hand. The latest government figures show that in March, Japan’s consumer price index fell 0.5 percent, annualized, a deflationary reading. But Japan’s bond prices imply that expectations for inflation two years from now have already jumped to well above 1.6 percent.

“It’s not quantifiable yet, but the psyche of the Japanese consumer may actually be changing,” said Taizo Ishida, lead manager of the Matthews Japan fund, a stock mutual fund for American investors. “Anecdotally, you can feel it,” he said. “People are beginning to put money into equity mutual funds in Japan, and consumers are buying luxury goods. But we’ll have to see where this ends up.”

MR. ABE, who faces elections in July in the upper house of the Diet, Japan’s parliament, has not unveiled all the details of his policy, which comprises “three arrows”: monetary easing, fiscal policy and structural reform. Monetary easing is the only one of the three that is substantially under way. It appears to be largely responsible for the yen’s weakening and could have a sharp impact.

Forced for many years to adjust to competitive pressures from overseas, Japanese companies said in a government survey last year that they were profitable at an exchange rate of 84 yen to the dollar, a big change from 1986, when they said they needed a rate of 175 yen to the dollar.

The current rate of more than 100 yen to the dollar will make many export-oriented companies much more profitable, said Eileen Dibb, a portfolio manager and Japan specialist at Pyramis Global Advisors, the institutional arm of Fidelity Investments. Her portfolios include Toyota and Fuji Heavy Industries, and both should benefit from the yen depreciation, she said. While the cheaper yen could heighten trade frictions, Mr. Abe says he would like Japan to join the negotiations for the Trans-Pacific Partnership, an Asia-Pacific free trade pact supported by the Obama administration.

Ms. Dibb is bullish on the Japanese stock market, saying it is still quite reasonably priced even after its recent run. In 1988, for example, the Topix traded at a price-to-book ratio of 6.5, compared with only 1.4 today, yet current earnings are attractive and strengthening. For the first time in years, she says, the outlook is extremely positive. “It’s as though Japan has turned the lights back on,” she said.

Mr. Abe has adopted a stimulative fiscal policy. It may give the economy a short-term boost, but in a speech in April, Christine Lagarde, managing director of the International Monetary Fund, warned that Japan’s fiscal policy “looks increasingly unsustainable,” saying its debt-to-G.D.P. ratio is now nearing an extraordinarily high 245 percent.

Japan has some factors in its favor, however, making it quite different from debt-burdened countries like Greece, said M. Campbell Gunn, portfolio manager of the T. Rowe Price Japan fund. Japan’s debt is overwhelmingly financed by its own citizens, he noted; it is denominated in its own currency, and Japan runs a steady current-account surplus, all of which insulate it from bond market pressure.

Furthermore, he said, Japan can reduce debt by privatizing or more efficiently operating billions of dollars worth of state-owned assets, like the nation’s ports and its postal system, which doubles as a gigantic savings bank. “Japan now is in some ways like the U.K. before Margaret Thatcher,” he said. “There is much that could be done if the government wanted to do it.”

Structural problems, however, are major impediments to economic growth. Japan’s population has been aging and declining in size, said Roger Aliaga-Díaz, a senior economist at Vanguard. Unless Japan permits enough immigration to offset this, he said, demographic constraints are likely to trim gross domestic product by 1.3 percentage points a year. “That’s a big hurdle for Japan,” he said.

Shifts like raising the retirement age and removing impediments to work force participation by women could improve matters, but improvements are likely to be slow in coming, he said.

Still, Japan’s markets have awakened, its economy may be reviving, and the flood of yen is certainly flowing into other markets around the world, Mr. El-Erian said. “This is an ambitious effort,” he said. But, he added, “Japan’s mounting debt load and difficult structural problems make this program a very high-risk and high-reward one.”

Haruhiko Kuroda Expected to Be Named Head of Bank of Japan

Haruhiko Kuroda, the current head of the Asian Development Bank, will be nominated to take over next month as the Japanese central bank’s governor, according to a governing-party lawmaker with knowledge of the plans.

Prime Minister Shinzo Abe has instructed officials of the governing Liberal Democratic Party to start negotiating with opposition parties to clear the way for Mr. Kuroda’s appointment, which must be approved by a divided Parliament, the lawmaker said. Mr. Abe is expected to submit his nomination to Parliament by the end of the week.

“This is a critical time for Japan’s economy, and we must avoid, at all costs, a failure to gain parliamentary approval for this appointment,” Mr. Abe told executives of the governing party Monday morning, according to NHK, the public broadcaster.

With Mr. Kuroda at its helm, the bank could take much bolder steps to kick-start economic growth. Mr. Kuroda, 68, has for years publicly criticized the Bank of Japan, saying it has not gone far enough to fight deflation and has urged the bank to adopt inflation targets and expand an asset-buying program to pump more funds into the economy.

Mr. Abe argues that aggressive monetary easing could make all the difference for Japan, which has struggled to grow amid persistent deflation, the damaging across-the-board decline in prices that has eroded profits, incomes, investment and consumption for almost two decades.

Expectations of moderate inflation — the government and the Bank of Japan have already made a joint commitment to aim for 2 percent — could encourage businesses to invest and consumers to spend, instead of hoarding cash. Mr. Abe’s government has also promised to promote growth through heavy government spending on infrastructure and other public works projects.

Mr. Kuroda would agree. In an interview with NHK this month, Mr. Kuroda blamed lack of an effective monetary policy for much of the country’s recent economic trouble.

“Japan alone has experienced deflation for 15 years, and whatever the causes, the main responsibility lies with the central bank,” Mr. Kuroda said. “It is not good for the global economy for Japan to remain mired in deflation and stagnation. It is imperative that we beat deflation and bolster economic growth.”

Still, the biggest fallout by far from adding money to the Japanese economy could be its effect on the yen. The currency has weakened more than 10 percent in the past three months as Mr. Abe has laid out his monetary agenda, prompting cries from some nations of currency manipulation.

Mr. Kuroda’s global experience could help Tokyo navigate that foreign criticism. From 1999 to 2003, Mr. Kuroda was Japan’s top currency diplomat as vice minister for international affairs at the powerful Japanese Finance Ministry. Since 2005, he has been president of the Asian Development Bank, an organization based in Manila with functions similar to those of the International Monetary Fund.

After news of Mr. Kuroda’s likely nomination, the yen again weakened and Tokyo stocks surged to their highest levels in more than four years, led by shares in export-focused companies.

Mr. Abe received a strong mandate to push a new economic agenda for Japan with a big electoral victory in December, which returned his party to power and gave him a second shot at the office of prime minister after a stint in 2006-7. Since then, his government has twisted the central bank’s arm to get it to set an inflation target and expand its purchases of assets from banks and other financial institutions.

The departing central bank governor, Masaaki Shirakawa, had argued that such policies would drive up government spending and exacerbate Japan’s public debt burden; the debt already amounts to more than twice the size of the economy. But Mr. Shirakawa and his supporters have been largely silenced by Mr. Abe’s electoral mandate. This month, Mr. Shirakawa said he would leave his post three weeks early, on March 19.

For economists and historians, Mr. Shirakawa leaves behind a less-than-noble legacy.

“Tolerating damaging deflation for so long was a crime,” Nicholas Smith, Japan strategist for CLSA Asia-Pacific Markets, said in a note.

Mr. Kuroda, a graduate of Tokyo University’s department of law, a training ground for top Japanese politicians and bureaucrats, has a master’s degree in economics from Oxford University and speaks fluent English. Despite his being a lifetime bureaucrat, he has been unusual in publicly voicing criticism of Japanese monetary policies, much which he lays out in his 2005 book, “Success and Failure in Fiscal and Monetary Policy.”

He beat out a fellow former senior Finance Ministry official, Toshiro Muto, who had strong backing among both bureaucrats and local politicians but lacks Mr. Kuroda’s top-level global contacts. Mr. Muto was also viewed as being more cautious than Mr. Kuroda on monetary policy.

Kikuo Iwata, a professor at Gakushuin University in Tokyo and another vocal critic of the central bank, is set to be tapped for one of the two deputy governor spots, according to local news reports. Mr. Iwata is also the author of several books criticizing the central bank, including “Stop Deflation, Now” and “Is the Bank of Japan Really Trustworthy?”

Hiroshi Nakaso, currently the Bank of Japan’s executive director for international affairs, is set to be promoted to the second deputy governor spot, according to NHK. Mr. Nakaso, who worked with his counterparts in other countries on contingency plans like currency swap agreements during the global financial crisis, has since maintained that the yen is overvalued.

DealBook: Japan Plans to Sell $10 Billion Stake in Cigarette Firm

Toru Hanai/ReutersA vending machine in Tokyo. Japan Tobacco is the world’s third-largest tobacco company.

TOKYO – The Japanese government is set to loosen its grip on Japan Tobacco, the world’s third-largest tobacco company, by selling a third of its stake in a sale that will net the country about $10 billion.

The Finance Ministry, which owns just over 50 percent of the former state monopoly, will sell 333 million of its shares in the cigarette manufacturer, according to a company statement issued on Monday.

The deal will be priced next month, from March 11 to 13, the statement said. In the run-up to the sale, Japan Tobacco will buy back up to 250 billion yen ($2.7 billion) of its shares.

Under laws passed in 2011 after a devastating earthquake and tsunami hit Japan, proceeds of the sale of Japan Tobacco shares will go toward rebuilding the country’s battered northeast coast. The reconstruction costs have threatened to weigh on Japan’s public finances at a time when public debt is twice the size of its economy.

It is an opportune time for the Japanese government to sell. Japan’s stock market has rallied since mid-November, and Japan Tobacco’s shares have tracked the market’s ascent, climbing 20 percent in the last three months.

Shares in Japan Tobacco closed 1.43 percent higher on Monday, at 2,901 yen, before the planned sale was announced. At that price, the government’s share sale would be valued at roughly 967 billion yen.

Japan has already been reducing its stake and involvement in the cigarette maker, which traces its origins to a Finance Ministry bureau set up in 1898 to create a national tobacco monopoly that lasted until 1985.

Even after the company went public, the Finance Ministry held two-thirds of its shares until 2004, when it reduced its stake to 50.1 percent, or roughly one billion shares. Other investors in Japan Tobacco include Mizuho Trust & Banking, Goldman Sachs and the Children’s Investment Fund Management.

The position in Japan Tobacco has put the government in a controversial position.

The government has squeezed more funds from its smokers, raising the price of a pack of cigarettes about 40 percent in 2010, its single largest increase in tobacco taxes. Still, cigarettes remain relatively cheap in Japan, at about $4.30 a pack.

But antismoking advocates have blamed the Japanese government’s continued ownership of Japan Tobacco – whose brands include Camel, Winston and Mild Seven – for the country’s delay in passing laws to protect nonsmokers from cigarette smoke, for example, and more stringently regulating of tobacco-related marketing.

In a 2012 report, the Washington-based Global Business Group on Health said Japan’s ownership of Japan Tobacco shares “leads to a national conflict of interest, in which the government treats smoking as a behavioral issue rather than a health concern.”

Though smoking rates have started to decline in recent years, the Japanese remain heavy smokers, consuming about 1,841 cigarettes a person, according to data compiled last year by the World Lung Foundation and American Cancer Society. That compared with about 1,000 cigarettes a person in the United States.

To make up for declining cigarette consumption at home, Japan Tobacco has aggressively expanded overseas, acquiring Britain’s Gallaher Group in 2007 for $15 billion, and adding the Silk Cut and Benson & Hedges brands to its portfolio. The company has also made a push into packaged foods and soft drinks, as well as pharmaceuticals.

The government’s sale of Japan Tobacco shares is part of a wider effort to raise money to finance reconstruction from the country’s natural and nuclear disasters in 2011. The government also plans to sell shares of Japan Post Holdings, which runs the country’s postal system and also acts as its biggest bank.

Yen Falls as Japan Forms New Government

Asian shares and other assets were capped in thin holiday trade, with investors focusing on the fate of U.S. negotiations to avert a budget crunch looming at the end of the year.

Markets in Singapore, Malaysia, Indonesia, the Philippines and South Korea were closed on Tuesday for the Christmas holiday, reopening on Wednesday.

Hong Kong and Australia remain closed on Wednesday. Europe also will not trade but, U.S. markets reopen later in the day.

MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.1 percent, after rising 0.3 percent the previous day on the back of a surge in Shanghai shares to five-month highs and a jump in Taiwan shares.

Shinzo Abe, whose party won a landslide victory in an election earlier this month, will be sworn in as Japan's premier on Wednesday, when he is also expected to appoint his cabinet. He is prescribing a mix of aggressive monetary policy easing and big fiscal spending to beat deflation and rein in the strong yen.

He has kept up pressure on the Bank of Japan to deliver much stronger monetary easing policies and called for a 2 percent inflation target to beat deep-rooted deflation, pushing the yen to a 20-month low of 85.38 yen on trading platform EBS on Wednesday. Traders eyed the dollar's 2011 high of 85.53 yen as the next target.

The euro rose as high as 112.47 yen on EBS, approaching its 16-month high of 112.59 yen hit on December 19.

The weaker yen has bolstered hopes for better earnings from Japanese companies and underpinned the Nikkei, which has gained some 17 percent since mid-November when the election was scheduled, fuelling expectations for Abe's party to win. The yen has lost nearly 8 percent against the dollar in the same period.

The Nikkei was up 0.4 percent, holding above the key 10,000 mark.

"Most foreign funds have added Japanese shares and there are fewer participants today, but there still is a reason for the Nikkei to rise," said Hideyuki Okoshi, general manager at Chibagin Securities. "Not only exporters but investors are buying other stocks which could benefit under the new government."

Japanese government debt prices fell, with the 10-year bond futures falling to a three-month low of 143.65 in active trade. The 10-year JGB yield rose 1.5 basis points to 0.780 percent, matching a six-week high hit on December 19.

"We continue to see equities going high, so the pressure is on the long end of the JGB curve. For the short end of the curve, we continue to see the BOJ ease aggressively, so there is no change in that," said Tadashi Matsukawa, head of Japan fixed income at PineBridge Investments.

Minutes of the BOJ's policy-setting meeting in November showed on Wednesday that some board members said the central bank must act decisively, without ruling out any policy options, if the outlook for the economy and prices worsens further.

The dollar was also expected to stay firm this week as investors repatriate dollars, and as the U.S. fiscal impasse is likely to continue to sap investor appetite for risky assets and raise the dollar's safe-haven appeal.

President Barack Obama may return to Washington from his Hawaiian holiday as early as Wednesday evening to address the unfinished "fiscal cliff" negotiations with Congress, an administration official said on Tuesday.

House of Representatives Speaker John Boehner failed to gain support for a tax plan at the end of last week, raising fears that the United States may face the fiscal cliff of some $600 billion in automatic spending cuts and tax increases set to start on January 1.

"The main index is rebounding after treading water on Monday and dropping on Friday, as investors eye the progress of U.S. fiscal negotiations," Kim Soo-young, an analyst at KB Securities, said of South Korean shares which turned 0.7 percent higher in low holiday volume.

Activity is likely to remain subdued, with volume low and without major economic news.

Later in the session, Thailand will release trade data, which is expected to show exports in November posting very high annual growth compared with low levels last year that reflected the damage from the flooding.

South Korea's key consumer sentiment index held steady in December from November and stood below the neutral point for a fifth consecutive month, the central bank said on Wednesday, diminishing hopes of a quick economic rebound.

Gold edged lower on Wednesday on uncertainty over whether the fiscal cliff, but a weaker yen sparked a rally in bullion futures on the Tokyo Commodity Exchange (TOCOM).

(Additional reporting by Ayai Tomisawa and Dominic Lau in Tokyo and Joyce Lee in Seoul; Editing by Daniel Magnowski and Chris Gallagher)

Japan Leader Keeps Up Pressure on Central Bank to Stimulate Economy

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Two Firms Bolster Japan Finance Groups

Morrison & Foerster and White & Case have bolstered their Tokyo offices with new finance hires.

Masahiro Shiga, a Japanese-qualified lawyer, or bengoshi, joins Morrison & Foerster as a partner from the Tokyo office of Skadden, Arps, Slate, Meagher & Flom, where he was also a partner and headed the Japan real estate practice.

Shiga has advised on the purchase of over $12 billion in Japanese real estate, as well as the issuance of more than $7 billion in real estate securities.

Morrison & Foerster has one of the largest Japan offices among Western firms, with 125 lawyers, including 50 bengoshi.

White & Case, also one of the largest foreign firms in Japan with over 100 lawyers, has added Timothy Jaffares as an of counsel in Tokyo.

Jaffares was head of Clifford Chance's Tokyo office from 2004 to 2008, when he relocated to the firm's Frankfurt office.

Like Shiga, Jaffares also focuses on real estate finance and securitizations. He also handles syndicated loan deals and leveraged finance transactions.

DealBook: Softbank of Japan to Buy Rival eAccess for $2.3 Billion

Yoshikazu Tsuno/Agence France-Presse — Getty ImagesMasayoshi Son, right, president of Softbank, the cellphone service provider that brought Apple’s iPhone to Japan.

Softbank, the cellphone service provider that brought Apple’s iPhone to Japan, said on Monday that it would buy a smaller rival, eAccess, for about $2.3 billion in stock, in the face of intensifying competition.

Under the terms of the deal, Softbank will pay 52,000 yen a share, more than three times the eAccess closing price of 15,070 yen on Friday.

The large premium reflects Softbank’s desire to bolster its mobile broadband capacity as it looks to attract more smartphone users. After the deal, Softbank would have more than 39 million subscribers, making it the second-biggest network operator in Japan, behind NTT DoCoMo.

“We do not think our shareholders will view this as a bad tie-up,” Softbank’s chief executive, Masayoshi Son, said in a statement. “I never liked third place. We fought for No. 2, and someday, we will be No. 1.”

Shares in eAccess rose 26 percent on Monday, to 19,000 yen, while those in Softbank slumped 1.7 percent, to 3,105 yen.

The deal underscores Japan’s changing mobile phone industry.

Softbank brought the iPhone to Japan, winning an exclusive contract with Apple in what some analysts described as a coup. While Softbank trailed KDDI by over 10 million subscribers at the time, Softbank has rapidly expanded its user base on the back of the explosive popularity of the iPhone.

But Softbank is now dealing with a more crowded field. Last year, KDDI began offering the popular Apple smartphone as well.

Since then, Softbank, whose networks are under pressure from the surge in smartphone users, has experienced a steady trickle of customers switching to KDDI, where users reported faster network speeds.

With the eAccess acquisition, Softbank will extend its Long Term Evolution services, a next-generation high-speed wireless network that is compatible with the iPhone 5. The deal will give Softbank 50 percent more LTE base stations, increasing them to an expected 30,000 by March.

“There is a severe battle going on,” Mr. Son said. “It’s all about who can expand the network fastest.”

In China and Japan, Economic Troubles Persist

HONG KONG — Two of the largest economies in the world, China and Japan, presented fresh data on Monday that underscored the persistent economic drag on the global economy despite the efforts of policy makers and central bankers around the world.

In China, an official gauge of manufacturing activity remained below the key level that separates contraction from expansion in September, as manufacturers continued to face sluggish demand both abroad and at home.

The purchasing managers’ index, released by the Chinese statistics office, came in at 49.8 — an improvement from the 49.2 recorded in August that appears to indicate that conditions are at least stabilizing after several months of declines.

But the reading still disappointed many analysts, who had expected it to nudge above 50.

The figure, analysts at ANZ said in a note, suggested “a continued weakness in the economy” and confirmed “our view that the policies implemented so far have failed to arrest a cyclical downturn.”

Chinese policy makers have sought to inject more momentum into the flagging economy for about a year by encouraging more bank lending, cutting interest rates and accelerating infrastructure approvals.

In recent months, however, these efforts have focused on localized, incremental steps, with policy makers apparently wary of fanning an investment binge and property price jump of the kind that followed the mammoth stimulus program announced in late 2008.

In Japan, meanwhile, a closely watched survey showed the mood among big manufacturers had worsened in the past three months.

The Tankan report , produced by the Bank of Japan every quarter, showed an index measuring large manufacturers’ assessments of business conditions had fallen to -3 from -1 in the previous survey. Although the figure was not as bad as feared, the outlook for the three months ending in December also stood at -3, signaling that large manufacturers see little prospect of imminent improvement.

As in China, the export-dependent Japanese economy is feeling the impact of feeble demand from Europe and the United States.

A euro zone manufacturing purchasing managers index on Monday spotlighted the extent to which the drawn-out debt crisis and the savings measures introduced by many governments have cut into growth. The index for September was 46.1, according to Markit Economics, and although that was an improvement from August, it was below the 50 mark that separates contraction and expansion for the 14th month in a row.

Many Asian economies have weathered the global financial and European debt crises relatively well, thanks in part to the fact that their own increasingly affluent populations have become powerful sources of demand.

Still, Europe and the United States remain major destinations for Asian goods, and weakening demand in those regions, combined with the slowdown in China’s once red-hot economy, has inevitably taken a toll on export sectors and stock markets around the region.

In Taiwan, one of the more export dependent economies in Asia, a purchasing managers index produced by HSBC slipped to 45.6 in September, a nine-month low.

A similar index for India, also released on Monday, remained unchanged from the previous month, at 52.8, but economists at HSBC cautioned that “global headwinds, the lagged effects of monetary tightening, and slow progress on structural reforms in recent years are holding down manufacturing growth.”

And in South Korea exports in September slipped 1.8 percent from last year, data published on Monday showed. That data was better than expected, but nonetheless showed that the global drags continue to weigh.

With a mature economy and a static population, Japan has been one of the weakest performers in the region.

Moreover, Japanese exporters are feeling the pinch of the strong yen, which has aggravated the overseas demand weakness by making Japanese goods more expensive for consumers abroad. The Japanese currency was trading at around ¥78 to the U.S. dollar on Monday. In August 2008, shortly before the collapse of Lehman Brothers, $1 bought ¥110.

More recently, the tensions with China over a group of disputed islands in the East China Sea have hurt trade with China.