Japanese Prime Minister Shinzo Abe will convene an advisory panel to consider an extra budget for the coming fiscal year, sources told Reuters, days after the Group of 20 nations urged more fiscal spending to support the ailing global economy.
Abe announced the plan yesterday, saying the panel would help him prepare for hosting a Group of Seven summit in May where the fragile state of global growth is sure to top the agenda.
“We need to do more to ensure stable growth for the world economy,” Abe told reporters.
“I want to hear the frank views of experts and well-known economists from both inside and outside Japan. We need to debate how G7 countries can cooperate.”
Financial market turmoil and economic contraction at the end of last year have increased pessimism about Japan’s domestic demand, but rising tax revenue and falling bond yields suggest it now has more leeway to spend.
Finance Minister Taro Aso told reporters on February 23 that he would not rule out a stimulus package for fiscal 2016-17, which starts from April.
“If there are changes in the economy, then it’s natural to respond with an extra budget,” said an official involved in fiscal policy, who said the government was seriously leaning toward more spending.
“Cash handouts for pensioners have only just started, but this could be an option,” the official said, referring to a policy that will start next month.
Timing was not yet clear on an extra package, he said, though ruling party heavyweight Toshihiro Nikai has said he suspected it was being prepared ahead of elections expected in July.
Abe advisor Masahiko Shibayama has also said the next package could include spending on childcare and elderly care to reduce the burden on the working population.
Economists are building extra spending into their forecasts.
“We are already factoring in an extra budget for money to be spent in fiscal 2017,” said Masamichi Adachi, senior economist at JP Morgan Securities.
“Nominal growth is good, and tax revenue is nominal, so the government should have enough money to spend.”
A spending boost could also offset the coming blow from a rise in sales tax to 10% from 8% in April 2017.
The government tried the same thing when it raised the tax to 8% from 5% in 2014, but its 5.5tn yen ($49bn) stimulus package was not enough to stop a recession. This time the size of the tax increase is smaller, and the government has already agreed to exempt food and other everyday goods, but politicians are worried.
Top government spokesman Yoshihide Suga said on Friday taxes should not be raised if it caused revenue to fall, suggesting a delay is possible.
A 2 percentage-point sales tax hike will cost consumers around 5tn yen, so government needs to spend 5 to 10tn yen to keep consumption on track, economists say.
“The size of fiscal stimulus should be at least equally as large as last time, possibly larger, given the global situation,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
Tax revenue is closely correlated with nominal gross domestic product growth, and on that measure Japan is set for a windfall, economists say.
Last calendar year, nominal GDP expanded at the fastest pace since 1994, when comparable data first became available. The finance ministry expects fiscal 2015/16 tax revenue to reach a 24-year high of around ¥56tn, more than their original estimate of ¥54.5tn.
Even if nominal growth slows, fiscal 2016-17 tax revenue could still top the government’s estimate of 57.6tn yen, economists say.
And the government could bring forward bond issuance, they say, as it can borrow at no cost, given the Bank of Japan’s (BoJ) negative interest rate policy.
Critics say Japan already has the world’s worst debt burden at twice the size of its economy and runs large budget deficits, so risks triggering a downgrade by credit rating agencies.
Fiscal doves argue that weakness in the world economy justifies it and bond markets are immune to ratings agencies while the BoJ is pumping out money by quantitative easing.
At a weekend summit the G20 sided with the doves by calling for more fiscal spending and less reliance on monetary policy to help the fragile global economy, which some investors say has reached its limit after years of quantitative easing and negative real interest rates.
Abe’s new panel will meet about five times before the G7 summit, and the debate could encourage other countries to shift away from fiscal austerity.
“This may not influence Europe, but China, South Korea and other Asian countries could follow Japan’s spending approach,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
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