Is this what Prime Minister Shinzo Abe meant when he pledged to “rev up the engine of Abenomics to the limit”? The government this week approved a new ¥28 trillion stimulus package — the largest in a series of economic measures taken since Abe returned to the helm of government in late 2012. But the sheer size of the latest package — reportedly inflated due to pressure from Liberal Democratic Party lawmakers riding the wave of the ruling coalition’s victory in the Upper House election last month — will not guarantee results. Fresh fiscal spending by national and local governments combined will come to ¥7.5 trillion, including that which will be paid for in fiscal 2017 and even later. The rest will come from low-interest loans of government-procured funds and private-sector spending to be generated by the stimulus.
The re-emphasis on large-scale stimulus measures may reflect a shift in the focus of Abe’s economic policy away from monetary easing by the Bank of Japan, whose massive asset purchase program may be nearing its limits after more than three years. The BOJ’s monetary “bazooka” under Gov. Haruhiko Kuroda since 2013 pushed down the yen’s exchange rate against the dollar, thereby pushing up earnings of major companies and driving up share prices. But the yen’s upturn in recent months — along with uncertainties over global slowdowns — has cast a shadow over corporate profits. The latest additional easing steps announced by the central last week are said to have disappointed the market as too little.
But the package seems to contain little in terms of structural reforms to generate new avenues of economic growth — one of the original “three arrows” of Abenomics, along with the BOJ’s monetary easing and the government’s aggressive fiscal spending, where not much has been achieved yet. It also features few fresh measures to address the problems behind the continuing slump in consumer spending, which accounts for 60 percent of the economy. The administration’s claim that the latest measures will push up the nation’s gross domestic product by 1.3 percent remains to be tested.
The package — billed by Abe as an “investment for the future”— is indeed wide-ranging. But its measures are heavy on public works and low-interest fiscal loans to the private sector — steps that were typical features of stimulus packages of LDP-led governments in the old days. About ¥3 trillion of the ¥4 trillion in additional national government outlays during fiscal 2016, to be incorporated in the second extra budget for the year, will be financed by issuing new government bonds — in the middle of a fiscal term for the first time in four years.
Fiscal spending on infrastructure investment such as improvements to ports and airports as well as tourism-related facilities may indeed include projects designed to sow the seeds for future growth, like encouraging more inbound tourism and increasing agricultural exports. Still, the effectiveness of such projects in generating demand needs to be closely examined, especially given the impact of such spending on the nation’s tight fiscal health.
Drawing particular scrutiny is the allocation of some ¥3 trillion in fiscal loans to the ¥9 trillion project to build a maglev train line between Tokyo and Osaka — which has been launched by Central Japan Railway Co. (JR Tokai) entirely at its own cost — so that completion of the Tokyo-Osaka service will be front-loaded by up to eight years. The government’s fiscal investment and loan program — in which money raised by the government is lent to the private sector at a low interest rate — used to be criticized for facilitating wasteful investments and bloating the public sector’s role in the economy, and has been scaled back since a major overhaul of the system in 2001. The latest package features a total of up to ¥6 trillion in such loans. But the effect of the loan to the maglev project in generating fresh demand is in doubt — especially in the near future since the plan is to build the Tokyo-Nagoya section by 2027 and then extend it to Osaka by 2045. It is questionable if front-loading the 2045 completion by eight years will have any sizable impact on the economy today.
The larger problem is that package is short of fresh measures to shore up consumer spending — which is crucial to a full-scale, sustained economic recovery. It features a cash allowance of ¥15,000 each to roughly 22 million people who are currently spared the residential tax — meant as a step to encourage low-income consumers to spend more. But the effect of the measure, against the cost of ¥350 billion, is in doubt, with experts predicting the one-off allowance will likely be either saved or used to cover the living expenses of the recipients, who remain hesitant to spend more in the face of sluggish income growth and the rising cost of living.
This year’s edition of the government’s economy and fiscal white paper — released the same day as the ¥28 trillion package — explores how consumer spending remains weak despite increases in wages and jobs and keeps dragging down the economy. The report says the employed are spending less of their income on consumption — creating a situation where wage gains do not automatically lead to higher spending — and attributes the trend to people’s increasing penchant to save due to concerns over their future.
This attitude is particularly strong among workers in their 30s and younger — a large portion of whom have unstable irregular jobs and have difficulty making future life plans. To get the younger generations to spend more, structural measures are needed to improve conditions for the irregular workers, according to the report, which also calls for improved child care services and reducing chronically long working hours to enable younger people to strike a balance between their work and family life.
Such an assessment echoes Abe’s newfound emphasis before and during the Upper House campaign on welfare measures, including a redistribution policy that used to be the trademark of the opposition camp, as the key to encouraging consumers to spend more. But the latest package does not seem to reflect that emphasis. It’s not clear if it will have much effect in boosting consumer spending.
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