The Abe administration’s latest stimulus package relies heavily on public works spending as a measure to shore up the economy when a sharp downturn in consumer spending is expected after the consumption tax is raised in April. The package, which has the central government spending more than it is due to receive in revenue from the consumption tax hike, shows that the Japanese economy has yet to enter a self-sustained cycle built on private-sector demand and investment.

The government is said to have prioritized public works projects that will have an immediate effect on the economy. The package, worth ¥18.6 trillion, includes measures to promote reconstruction work in areas hit hard by the March 2011 quake-tsunami disaster and new infrastructure investment, such as road construction in and around Tokyo, ahead of the 2020 Summer Olympic Games.

It is the second major stimulus under Prime Minister Shinzo Abe, following the ¥20 trillion package adopted in January. Public works projects earmarked in the last package underpinned the slowing 1.1 percent annualized growth in gross domestic product for the July-September period, when consumer spending and capital investments by the private sector rose a mere 0.2 percent and 0.01 percent, respectively, from the previous quarter.

Consumer spending is forecast to pick up in the months through March as people are expected to buy expensive goods before the consumption tax rate is raised to 8 percent in April, while a sharp downturn is deemed inevitable in the April-June period. The stimulus is aimed at easing the impact of the tax raise and prevent the economy from losing steam.

The stimulus package features cash handouts of some ¥600 billion to people likely to be hit hardest by the consumption tax hike — low-income households, families with children and home buyers. But the handouts’ effectiveness will be questionable as they are a one-off measure while the tax hike will continue to eat into recipients’ disposable income.

Of the ¥18.6 trillion package, the central government plans to spend ¥5.5 trillion, with the rest to be covered by local government spending and private-sector investments to be spurred by the government’s policy steps. Central government spending alone will exceed the additional ¥5.1 trillion that the three-percentage point hike in the consumption tax rate in April is expected to bring for both the central and local governments in fiscal 2014.

The latest stimulus will not entail issuance of additional government bonds. The government plans to use a windfall in tax revenues for the current fiscal year — estimated to be ¥2.3 trillion higher than earlier forecast — as well as surplus funds from fiscal 2012 and the unused portion of the budget for reconstruction of areas hit by the 3/11 disasters. But the new spending package comes at a time when the national government debt hit ¥1.011 quadrillion by the end of September.

The economic recovery since Abe took office nearly a year ago has so far been driven by public-sector actions — the government’s aggressive spending and the Bank of Japan’s monetary easing operations.

The stimulus includes ¥1.4 trillion to finance steps to bolster industrial competitiveness, such as subsidies to encourage investment by small companies. The government will separately introduce ¥1 trillion corporate tax cuts to encourage firms to raise wages. But these steps will depend on actions by the companies to have the desired effect. While some leading companies, especially ones that enjoy improved earnings from the yen’s fall, say they are ready to translate their profits into higher pay for their workers, it remains to be seen how widespread the wage hikes will be across the economy.

Repeated large-scale fiscal pump-priming cannot continue indefinitely. The private sector needs to take over as the engine of recovery.

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