Japan leans on fiscal stimulus to keep recession at bay

Tokyo

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 (S$325 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.

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, Mr 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 (S$54 billion) 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 (S$125 billion) left markets largely unimpressed.

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, Mr Abe looks intent on minimising the risk of a recession that would tarnish the record of his Abenomics growth programme, 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 on every school child's desk through the end of junior high school.

"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 (BOJ) welcome breathing space to keep its monetary easing policy on hold as fiscal policy takes the driving seat in propping up growth.

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 programme 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 US-China trade war, but it is forecast to shrink 2.7 per cent in annualised 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.

Still, economists were sceptical that the measures would boost growth by the 1.4 percentage point set out by the government.

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 labour shortages and already solid demand for construction companies," Mr Shiono said. BLOOMBERG