(Bloomberg) -- 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 draft of the package obtained by Bloomberg. The stimulus will boost real growth by about 1.4 percentage point, the draft said.
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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 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.
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 draft indicated that finding for the measures in the extra budget would be around 4.3 trillion yen.
While the package was slightly larger than expected, the single-digit size of fresh spending measures left markets largely unimpressed.
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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 of a rebate system for cashless payments and to put a tablet or device on every school child’s desk up to the end of junior high school, according to the draft.
“The size of the package is pretty big considering the official government assessment of the economy is that it remains on a recovery trend. We’ve heard a lot about preventive interest rate cuts, but these are preventive fiscal measures,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo.
The support for the economy through the extra 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.
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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 growing 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.
While Japan’s economy has kept growing in the first three quarters of 2019 despite the slowdown in global trade exacerbated by the U.S.-China trade wary, it is forecast to shrink 2.7% in annualized terms this quarter, according to economists surveyed by Bloomberg. The sales tax hike and a destructive typhoon, combined with weak exports are the factors set to push the economy into reverse.
The package would aim to get Japan’s economy up and running again to avoid any further deterioration in global demand triggering a recession early next year.
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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