Japan looks set to re-embrace the power of public spending with one of its biggest ever stimulus packages.
Slowing global growth, a higher sales tax and a string of natural disasters are giving policy makers in Tokyo plenty of reasons to lead a world-wide shift towards a double-barrelled approach of supporting the economy through fiscal measures and ultra-loose monetary policy.
That’s good news for the Bank of Japan, which has appeared reluctant to ramp up its own massive stimulus programme, as it strains at the limits of effectiveness.
In less than a month, expectations in Japan for a modest stimulus package with a face value of ¥5tn ($46bn) have ballooned to ¥20tn, that’s despite the country having the developed world’s largest public debt load.
While only half the amount is likely to represent fresh spending, a price tag of 10tn would still make it Japan’s biggest package since extra budgets to deal with the widespread destruction of the 2011 tsunami and the emergency spending that followed the global financial crisis before that.
The escalating spending figure demonstrates Prime Minister Shinzo Abe’s determination to stop a sales tax hike, typhoons and weakness in the world economy triggering a recession that would tarnish the legacy of his Abenomics project to restore stable growth. Already Japan’s economy is expected to shrink 2.7% this quarter as exports continue to slump and consumption is whiplashed by the tax increase.
Data out this week showing sharper-than-expected drops in retail sales and factory output may add weight to calls for a substantial package.
The rising figure may also reflect a need to shore up Abe’s political support after recent scandals, with a possible view to seek another term as premier or call an early election - a favourite tactic of Japan’s longest-running prime minister.
“We don’t really need this huge level of stimulus now,” said Shinichiro Kobayashi, an economist at Mitsubishi UFJ Research & Consulting. “Somewhere around 5tn yen should be more than enough. This is not about the economy but motivated mainly by political reasons with popularity and a possible election in mind.”
Some economists wonder whether extra spending equivalent to 1.8% of Japan’s gross domestic product would actually be cost effective. Given a labour shortage in the construction sector, extra public works spending would simply reduce the availability of scarce workers for the private sector, crimping output there.
BoJ governor Haruhiko Kuroda on Thursday called on the government to spend wisely with its spending package. Still, there seems little doubt now, that a hefty package is now in the works.
“Japan is the easiest place in the developed world to increase spending,” said Masamichi Adachi, chief Japan economist at UBS Securities Company. “Politicians love it and they’ve probably gotten tired of all the warnings of a debt crisis that hasn’t actually happened over the last decade.”
Even the International Monetary Fund called for closer co-ordination between Japan’s government and the central bank this week, essentially giving its support for the use of fiscal policy in the shorter term, though it said Tokyo should also get out of the habit of annual extra budgets. Abe is expected to announce details of the economic package including its final size by mid-December. The burgeoning spending plans are already changing perceptions of what Japan’s central bank will likely do.
JPMorgan said Tuesday that it now expects no BoJ easing through next year given the likely spending, changing from its view that Kuroda would take additional steps next month. Chotaro Morita of SMBC Nikko Securities estimates economic growth could jump well beyond 2% in fiscal 2020, the fastest growth since 2013, with extra spending of ¥10tn.
Former deputy prime minister Katsuya Okada, a member of the opposition, says that the loosening fiscal stance of politicians both among the ruling and opposition parties is alarming. “I’m very concerned about this emerging mood that there’s no need to address our spending and revenue,” Okada said.
“There’s no doubt that Modern Monetary Theory has given some politicians the feeling of a sort of endorsement for more spending. But a frog in lukewarm water will end up boiled if the temperature keeps rising.”
“Our basic view is that Japan’s growth would slow as a result of weakening external demand pressuring exports. This is playing out, but the trajectory is a little weaker than anticipated. All this adds up to a greater need for fiscal support, given the Bank of Japan’s hands look mostly tied”, says Bloomberg’s economist.
Pedestrians cross a road in front of the Bank of Japan headquarters in Tokyo. Slowing global growth, a higher sales tax and a string of natural disasters are giving BoJ policymakers plenty of reasons to lead a world-wide shift towards a double-barrelled approach of supporting the economy through fiscal measures and ultra-loose monetary policy.
