Prime Minister Taro Aso’s next stimulus package may need to exceed ¥10 trillion to bolster an economy heading for its worst postwar recession, analysts say.
Aso, whose approval rating has plunged ahead of an election that must be called by September, called this month for fresh spending to counter the export-led recession, which threatens to engulf consumers at home as companies fire workers and cut wages. He has already pledged ¥10 trillion since October.
“The domestic economy might really tank and there’s basically no way out of it except if the government helps,” said Martin Schulz, a senior economist at Fujitsu Research Institute. “It is absolutely necessary for Japan to keep the domestic economy going.”
Finance Minister Kaoru Yosano said Sunday that a new package would require trillions of yen after the economy contracted at the fastest pace in more than 30 years last quarter.
“It’s not a situation where new fiscal spending of ¥2 trillion to ¥3 trillion would be enough of a remedy,” Yosano said on TV Asahi’s “Sunday Project” program. A figure of ¥20 trillion is “not out of line,” he said.
Economists are using the nation’s output gap, a measure of the balance between supply and demand in the economy, as one indication of how large the package will need to be. Fujitsu’s Schulz estimates the nation’s domestic demand shortfall is about 2 percent, which would require about ¥10 trillion in spending to fill.
Spending of that scale may be needed to have “a substantial impact” on the economy, said Seiji Adachi, a senior economist at Deutsche Securities Inc.
The stimulus may need to be even larger when taking into account the unprecedented slump in overseas demand, according to Junko Nishioka at RBS Securities Japan Ltd.
“The government should spend about ¥20 trillion at least to fill the supply-demand gap as Japan’s recession is deepening and facing the risk of falling back into deflation,” Nishioka said.
The output gap widened to 4.1 percent in the three months ended Dec. 31, the Cabinet Office said last week, the biggest since the first quarter of 2003.
Business leaders including Japan Business Federation (Nippon Keidanren) Chairman Fujio Mitarai and Japan Chamber of Commerce and Industry Chairman Tadashi Okamura on Saturday called on the government to pass a stimulus package worth ¥30 trillion once the main budget has cleared the Diet.
Liberal Democratic Party lawmakers are urging Aso to devote money to public works, including spending in rural areas and maintenance of roads, airports and harbors, as well as development of maglev train line projects.
“Spending on public works could be a quick remedy for the economy, but money shouldn’t be used in a conventional way on roads and buildings,” said RBS’s Nishioka. “The government should spend more on growth areas including environmental projects,” such as alternative energy, solar panels and hybrid automobiles, she said.
Fujitsu’s Schulz said lower-tech projects such as insulating buildings might be more effective at supporting employment in the short run. “Money should be spent as fast and as efficiently as possible,” he said.
The government may need to borrow more to finance any extra spending, adding to the public debt, which at more than 170 percent of gross domestic product is the largest among developed countries. That may put more pressure on the Bank of Japan to increase its purchases of government bonds from banks.