Room for maneuver on fiscal policy seems limited for Group of Seven economies when their finance ministers and central bank chiefs discuss growth at a meeting in Sendai on Friday and Saturday.
This is unwelcome news for Japan, which is looking to hammer out new fiscal stimulus in the coming months and hopes to champion coordinated action with G-7 counterparts amid growing economic uncertainty in Japan and abroad.
While the finance ministers do not plan to issue a communique in Sendai, the content of their discussions will be closely watched, as Prime Minister Shinzo Abe has said the economy is a top priority during the G-7 Ise-Shima summit next week.
With an Upper House election scheduled for this summer, Abe is apparently weighing introducing fiscal policy that appeals to voters. His ideal scenario would be to take such action in coordination with other G-7 economies to foster the image that he is leading efforts to spur global growth.
But it will not be easy. Nations like Germany and Britain remain committed to austerity, even as the drumbeat grows for a loosening of fiscal reins to stimulate growth.
“With policy rates near zero in many advanced economies, fiscal policy should stand ready to support demand and bolster monetary policy where needed and where fiscal space is available,” the International Monetary Fund said in a report in April.
It added: “The focus should be on fiscal measures that boost both short- and medium-term growth (such as infrastructure investment) and policy actions that support the implementation of structural reforms.”
Business leaders from the G-7 economies who gathered in Tokyo for a meeting last month also pointed out that the economy “is far from reassuring . . . it is imperative for the G-7 to not rely solely on monetary policy but to implement flexible fiscal policy . . . (and) carry out fearless structural reforms.”
The difference between Japan and Germany on this issue appeared clear when Abe met with German Chancellor Angela Merkel earlier this month during a visit to Europe.
Merkel said that while fiscal stimulus, monetary policy and structural reform are important tools, Germany will not take the lead in any fiscal expansion.
“Without Germany’s participation, any cooperation in fiscal spending would be seen as ineffective. But it’s really unclear whether Germany will declare its readiness to expand its fiscal spending,” said Kenji Yumoto, vice chairman of the Japan Research Institute.
Finance Minister Taro Aso admitted on Tuesday that joint action is “not so easy,” as each nation has its own political fiscal situation.
But Japan’s hope for joint fiscal action has dimmed.
Nobel-winning U.S. economist Paul Krugman disclosed the contents of a supposedly off-the-record conversation with Abe in March, in which the prime minister reportedly sought advice on how to get Germany on board with fiscal stimulus.
Krugman replied it would be difficult.
Yumoto, of the Japan Research Institute, said it makes good sense from the perspective of domestic politics for Abe to push for coordinated G-7 fiscal stimulus.
With the election in July and an economy that remains wobbly, Abe can show voters that the government is striving to spur the economy, said Yumoto.
If Abe can create the impression that Japan is leading a combined effort by G-7 nations, “the size of the fiscal stimulus would be justified” even if the debt-ridden government is forced to spend a huge amount, he said.
Meanwhile, commentators are also paying attention to the recent difference of perspective between the United States and Japan over the yen.
A weaker yen was one of the key tools of Abenomics to boost not just the profits of exporters but also stock prices.
This year, though, the yen has fled in the opposite direction. The dollar was at ¥120 at the beginning of the year but slumped to a low of ¥105.55 recently.
As of Thursday, it was around ¥110.
Aso has asserted that the yen has strengthened too much recently and that the government is ready to intervene if the trend continues.
Yet U.S. Treasury Secretary Jacob Lew has insisted that the market remains “orderly,” a thinly veiled warning against intervention. He has placed Japan on a watch list.
Meanwhile, the Sendai meeting will also focus on international money flows, including tax evasion and terrorist financing.
In the wake of the leak of the so-called Panama Papers, which detailed how one offshore tax haven is used, the international community is gearing up to tackle the issue.
A meeting last month of finance ministers from the Group of 20 nations urged countries seen as tax havens, such as Panama and Lebanon, to join an OECD-led information sharing framework. The ministers warned that “defensive measures” would be considered if the havens remain uncooperative.
The G-7 meeting in Sendai is expected to extend such efforts further.
It also aims to recognize a G-7 action plan on terrorist funding, strengthening the sharing of information between members and shoring up cooperation on financial sanctions based on U.N. Security Council resolutions.