Japan Leans on Fiscal Stimulus to Keep Recession at Bay
Japan’s total stimulus package amounts to around 26 trillion yen ($239 billion) spread over the coming years.
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Japan’s Prime Minister Shinzo Abe announced stimulus measures to support growth in an economy contending with an export slump, natural disasters and the fallout from a recent sales tax increase.
The total stimulus package amounts to around 26 trillion yen ($239 billion) spread over the coming years, with fiscal measures around half that figure, according to a government document released after a cabinet meeting Thursday evening. The stimulus will boost growth in the economy by about 1.4 percentage point, the document said.
“We shouldn’t miss this chance, this is exactly when we should accelerate Abenomics and overcome our challenges,” Abe said, shortly before the cabinet meeting approving the measures.
The extra spending comes amid a rising awareness around the world that more government help is needed to keep economies growing in the face of a global slowdown that is exposing the limits of relying on central banks to do the heavy lifting of economic management.
“In any country, the positive impact of extra monetary stimulus is limited, which is especially true in Japan and Europe where rates have turned negative. You have no effective choice but to execute fiscal measures to support growth,” said Harumi Taguchi, Tokyo-based principal economist at IHS Markit.
Earlier in the day, Abe described the stimulus as a three-pillared package designed to aid disaster relief, protect against downside economic risks and prepare the country for longer-term growth after the 2020 Tokyo Olympics.
He said the stimulus would be funded by a supplementary budget for the current fiscal year ending in March, and special measures in the following year. The package outlines 4.3 trillion yen in funding for the measures in an extra budget this fiscal year.
While the package was slightly larger than expected, the fresh spending measures of under 10 trillion yen left markets largely unimpressed. The officially released figures at the end of the day all matched the numbers contained in a draft seen by Bloomberg News earlier Thursday.
Economists, meanwhile, cast doubt on whether the extra spending really packed the punch claimed in the draft. They said the government could have timed the tax increase better, but also asked if a perfect time for a tax hike exists.
With the package, Abe looks intent on minimizing the risk of a recession that would tarnish the record of his Abenomics growth program, while shoring up his own political support after recent scandals. To that end, an array of measures with a large price tag that can be paid for with the bare minimum of extra borrowing would fit the bill for a country with the developed world’s largest debt load.
The package earmarks spending to improve the country’s resilience to extreme weather, to extend a rebate system for cashless payments and to put a tablet or device on every school child’s desk through the end of junior high school.
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“The size of the package is pretty big considering the official government assessment of the economy is that it remains on a recovery trend,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “We’ve heard a lot about preventive interest rate cuts, but these are preventive fiscal measures.”
Extra government spending gives the Bank of Japan welcome breathing space to keep its monetary easing policy on hold as fiscal policy takes the driving seat in propping up growth.
Barclays Changes BOJ Call, Expects No Easing Through FY2021
Ahead of the announcement of the plan, some economists had already switched their forecasts on the BOJ’s policy stance toward a holding pattern rather than additional action, taking into account the likelihood of the stimulus package and the central bank’s lack of extra ammunition.
The BOJ has already piled up assets worth more than the size of Japan’s entire economy in its bid to support growth and inflation. But the mounting side effects of its easing program on the banking sector and a perceived lack of effectiveness of taking yet more action are keeping the bank on hold unless absolutely necessary.
Japan’s economy kept growing in the first three quarters of 2019 despite an export slump exacerbated by the U.S.-China trade war, but it is forecast to shrink 2.7% in annualized terms this quarter. The sales tax hike and typhoon damage, combined with weak exports are the factors set to push the economy into reverse.
The package aims to get Japan’s economy up and running again to avoid any further deterioration in global demand triggering a recession early next year.
Punching Power
Still, economists were skeptical that the measures would boost growth by the 1.4 percentage point set out by the government.
Based on rough calculations following the news, Masaki Kuwahara, senior economist at Nomura Securities Co., saw a boost of around 1 percentage point over time from the package. More specifically, he said the economy would get a 0.6 percentage point gain over the next two fiscal years.
Takashi Shiono, economist at Credit Suisse Group AG, said the kick from the spending would be up to 0.2 percentage point in the coming year.
“That’s probably smaller than the consensus view, but we think the budget for public spending can’t be spent so quickly because of labor shortages and already solid demand for construction companies,” Shiono said.
What Bloomberg’s Economist Says
“Japan’s fiscal stimulus package appears to be a marginally larger than expected, going by the size of the planned extra budget and actual spending in the draft reported by Bloomberg News. This is clearly positive for growth -- likely helping avert a recession -- but it won’t be sufficient to prevent a significant slowdown in 2020.”
--Yuki Masujima, economist
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--With assistance from Emi Urabe and Emi Nobuhiro.
To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net;Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net
To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Jason Clenfield
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