Business

Massive fiscal stimulus in works as Japan's politicians shrug off concerns about national debt

by Toru Fujioka and Emi Urabe

Bloomberg

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 policymakers in Tokyo plenty of reasons to lead a worldwide shift toward a double-barreled approach of supporting the economy through fiscal measures and ultraloose monetary policy.

That’s good news for the Bank of Japan, which has appeared reluctant to ramp up its own massive stimulus program, 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 ¥5 trillion ($46 billion) have ballooned to ¥20 trillion, despite having the developed world’s largest public debt load.

While only half the amount is likely to represent fresh spending, a price tag of ¥10 trillion would still make it Japan’s biggest package since extra budgets were drafted to deal with the widespread destruction from the 2011 mega-quake and tsunami, and the emergency spending that followed the 2008 global financial crisis.

The escalating figure demonstrates Prime Minister Shinzo Abe’s determination to stop a consumption tax hike, typhoons and a weakening world economy from triggering a recession that would tarnish the legacy of his “three arrows” Abenomics project to restore stable growth. Already Japan’s economy is expected to shrink 2.7 percent this quarter as exports continue to slump and consumption is whiplashed by the tax increase to 10 percent.

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 prime minister or call an early election — a favorite 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 ¥5 trillion 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 percent of Japan’s gross domestic product would actually be cost-effective. Given a labor 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 Gov. 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 Co. “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 coordination 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 the BOJ will likely do.

JPMorgan said Tuesday it now expects no BOJ easing through next year, given the likely spending, parting 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 percent in fiscal 2020, the fastest growth since 2013, with extra spending of ¥10 trillion.

Former deputy Prime Minister Katsuya Okada, a member of the opposition, says that the loosening fiscal stance of politicians among both the ruling and opposition camps 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.”