Commentary / Japan

What Japan's next stimulus package should aim for

by Heizo Takenaka

On Nov. 20, Shinzo Abe became Japan’s longest-serving prime minister. He and Chief Cabinet Secretary Yoshihide Suga deserve credit for making such a long-running administration possible amid tough attacks from the opposition camp and the media as well as a series of problems.

Today, populism is on the rise in many countries and governments tout protectionist policies that put their own interests first. But Abe has maintained a stable administration for years now and boosted Japan’s presence as a champion of defending the world against protectionist threats. A key factor making this possible is the administration’s generally solid management of the domestic economy and popular support for its performance.

However, the world economy is confronted with slowdown risks, which are particularly evident among European economies. Five major research institutions in Germany, the core of the European economy, lowered that nation’s 2020 growth forecast to 1.1 percent, down from 1.8 percent. The OECD is even more pessimistic — forecasting a mere 0.6 percent growth — and private think tanks in Germany similarly anticipate lower growth than is being projected by the major institutions.

Symbolic of Germany’s economic woes was the negative GDP growth in the second quarter of this year. Germany relies heavily on exports to drive its economy (its exports account for 47 percent of its gross domestic product, compared with 18 percent in Japan), and the slowdown of its economy reflects the contraction of global trade amid the continuing trade disputes between the United States and China.

There are more positive views of the economy going forward. The International Monetary Fund now says global growth this year will slow significantly to 3 percent from the earlier forecast of 3.9 percent but predicts that growth will pick up to 3.3 percent next year. Many experts, however, seem to think of that forecast as being too rosy.

Japan is not immune to the signs of an economic slowdown. According to a tally by the Nikkei business newspaper, the combined net profit of listed companies in the April-September period was 14 percent lower than in the same period of 2018. It was the first decline in three years, and the picture is even more dire among manufacturers, which saw their total profits slide by 31 percent.

In the Cabinet Office’s latest “economy watcher” survey, which is believed to be the most sensitive to ups and downs of the economy, the seasonably adjusted diffusion index on the assessment of current state of the economy worsened for the first time in three months, falling by the largest margin since the index fell 15.7 points in April 2014, when the consumption tax was hiked from 5 percent to 8 percent. It seems undeniable that the economy is losing steam.

The consumption tax was raised from 8 percent to 10 percent on Oct. 1. So far, various indicators suggest the hike has brought only minor immediate damage to the economy, mainly because the government has taken steps like tax deductions and subsidies to shore up consumer spending on expensive purchases such as housing and cars. But it needs to be assumed that the hike will eventually have significant negative effects on the economy through increased prices and subsequent reductions in real wages.

Abe on Nov. 8 ordered government ministries and agencies to compile an economic package. Normally, a stimulus package is introduced to halt a slide in the economy and bring it back up again. This time, however, the planned package seems to be a bit different in nature — because the government, in the monthly economic assessment by the Cabinet Office, holds that the economy remains on a path of moderate recovery.

In his order to the government organizations, Abe specifically says the package will be put together to prepare for the “downside risk” originating overseas such as the U.S.-China trade friction materializing and negatively affecting the economy in such forms as reduced investment by the corporate sector. In other words, the latest economic package, unlike the usual stimulus packages, is meant to be a preventive measure to brace for a downturn in the economy.

But in reality, there are important grounds that necessitate increased fiscal spending to spur the economy. First, the nation’s GDP growth for the latest, July-September period came to a mere 0.2 percent on an annualized basis. Second, the government has poured some ¥6 trillion in extra spending in 2019 after the economy was hit by the impact of a series of natural disasters.

In other words, demand generated by the extra ¥6 trillion in spending will wear off unless more additional economic steps are taken. Put bluntly, the government has to expand fiscal spending at least to the tune of ¥6 trillion to prevent downward pressure on the economy. Given that it will be hard to expect more stimulus effects through monetary policy, the government must have determined that greater fiscal spending will be inevitable to shore up the economy — while seeking to control fiscal deficit.

What’s important to note is that while the growth potential of Japan’s economy is believed to be around 1 percent, growth below this level will expand the demand-supply gap and once again fuel deflationary pressures. The Abe administration has become the longest-serving by putting priority on busting deflation, and an economic condition that puts the nation back into a state of deflation is unacceptable.

The question is the content of the fiscal stimulus — which is expected to be fairly large. Abe’s orders for the economic package include key features such as spending related to disaster defense and reconstruction, support for small and medium-size businesses, and promoting innovation.

Whether the government can put together a truly wise spending package that generates more demand and at the same time increase the growth potential of the economy will test Abe’s long-running administration.

Heizo Takenaka, a professor emeritus of Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.