Japan’s Abe Will Likely Add to Record $555 Billion Stimulus

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(Bloomberg) -- Prime Minister Shinzo Abe now has a record stimulus plan to help Japan’s households and businesses survive the coronavirus pandemic. History suggests there will be even more to come.

Japan’s ruling party has proposed a 60 trillion yen ($555 billion) package of measures worth more than 10% of gross domestic product, less than four months after its last economic stimulus. The prime minister had demanded a package bigger than the steps taken during the global financial crisis.

Read more: Sentiment at Japan’s Big Manufacturers Plunges to 7-Year Low

Abe reiterated his pledge to deliver Japan’s largest-ever economic stimulus on Wednesday following a central bank survey showing a steep drop in confidence among the country’s biggest companies.

Still, the repeated launching of spending measures after the collapse of Lehman Brothers in 2008 suggests Abe’s giant-sized first aid against the virus won’t be his last as Japan suffers extra pain from the fallout overseas.

Japan’s Abe Will Likely Add to Record $555 Billion Stimulus

The world has changed dramatically since Abe’s stimulus measures in December, with large swathes of some of the biggest economies put into lockdown to curb a rising death toll. That’s idled factories, closed shops and restaurants, caused widespread layoffs and limited consumer spending to all but the basic necessities.

Japan now joins aggressive support moves by the U.S., Germany, Italy and South Korea with its plan to unleash more spending.

Japan is at risk of a deepening recession due to the pandemic, the hangover from a sales tax hike and the postponement of the Olympic Games. In the three months starting in April, some analysts see the economy shrinking more than 10%, the biggest plunge since Abe took the helm in 2012. If the Tokyo metropolitan area, which accounts for a third of the economy, also heads into a strict lockdown, the damage would get a whole lot worse.

Abe will probably have to compile multiple sets of measures like the government did after the collapse of Lehman, said Koya Miyamae, a senior economist at SMBC Nikko Securities Inc. “You can’t really stimulate the economy until it settles down again, so the chattering about more stimulus to come will inevitably continue.”

The scars of the Lehman shock run deep in Japan. While the nation had little to do with the subprime loans that helped trigger the turmoil in the global financial system and beyond, Japan’s economy ended up shrinking more than the U.S. economy as a result.

Picking up the pieces after the crisis, Japan Inc. looked to offshore its production at a faster pace and build up bigger reserves to protect itself against future shocks. The heightened miserliness of Japanese firms is part of the reason wages have failed to show the gains of recent full employment.

Main Post-Lehman Measures
Oct. 2008

26.9 trillion yen --- 5 trillion yen in fiscal measures

(Cash handouts, cheaper highway tolls, lowering job insurance)

Dec. 2008

37 trillion yen ---10 trillion yen in fiscal measures

(Subsidies for companies keeping jobs, expansion of housing tax reductions)

April 2009

56.8 trillion yen --- 15.4 trillion yen in fiscal measures

(Employment subsidies, childcare handouts, cash points for eco-friendly cars, appliances)

Back in December 2008, the Japanese government had already racked up measures worth around 75 trillion yen in three packages as it sought to stop the economy from falling into the abyss. In the following quarter the economy still shrank at an annualized pace of 18%, prompting a 57 trillion yen package in April 2009 and another one in December.

Abe still has a long way to go before he reaches the 157 trillion yen tally of those five sets of measures even if Tuesday’s 60 trillion yen plan takes him beyond the biggest of the financial crisis packages.

“You should take all the numbers with a pinch of salt,” said Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Morgan Stanley. “Actual spending often ends up a lot smaller than what gets announced.”

The headline numbers can be misleading. The envisaged scale of loan programs, loan extensions and private-sector initiatives can inflate the size. Fiscal measures are typically well below half the overall total and even these often contain a mix of government lending and investment that leaves even less actual one-way spending.

Japan’s Abe Will Likely Add to Record $555 Billion Stimulus

Looking at how much additional expenditure the government needed to fund outside its annual budget offers a measure of how much extra the public purse had to pump into the economy. Those figures suggest extra spending was closer to 5.9 trillion yen in 2008 and 14 trillion yen in 2009, a figure only topped by the response to the 2011 tsunami and nuclear disaster.

There are lessons to be learned on the measures employed more than a decade ago, too.

“What’s different this time is the government can only take defensive measures because the virus situation could worsen. All they can do is ease income losses, but they can’t turn the economy around,” Miyamae said. “Unlike the Lehman crisis you can’t just expand growth or tax revenue by expanding government spending.”

What Bloomberg’s Economist Says

“What Japan needs for now is to buy time until the coronavirus outbreak is contained. As long as the Japanese government can protect jobs and household income and avoid firms going bankrupt, the economy could recover quickly.”

--Yuki Masujima, economist

©2020 Bloomberg L.P.

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