Japan’s Prime Minister Yoshihide Suga is preparing a third extra budget to supplement two earlier packages worth about 11% of gross domestic product. COVID-19 infections are climbing, authorities are cracking down on social activity, and the spurt in growth last quarter — the most since the 1960s — appears to be dissipating. But the shot of fiscal caffeine announced Tuesday, which has an overall value of ¥73.6 trillion ($708 billion), is about more than keeping the economy ticking.
It’s about Suga’s political survival. The premier needs his own mandate after taking the helm of the the ruling Liberal Democratic Party four months ago, when Shinzo Abe stepped down because of ill health. That means he needs to keep the economy nicely juiced until September, the likely date for a nationwide poll.
Almost as soon as Suga was sworn in, top LDP figures mused about a snap election to lock in support. The prime minister prevaricated, which is a risky proposition during a pandemic. Now he’s hostage to events. Support for Suga’s cabinet skidded to 50.3%, according to a survey published on Sunday, compared with 63% the previous month.
The economy looks to be running out of steam. GDP jumped an annualized 21.4% in the three months through September from the previous quarter. Still, the rapid expansion only managed to claw back about half of the growth lost since last year. An ill-advised consumption-tax hike in late 2019 put Japan behind the eight ball before the pandemic began.
The virus’s resurgence is likely to keep a keep a lid on further gains in exports and consumer spending. Meanwhile, recorded virus cases have surged to new daily highs in Tokyo. Regional governors have urged people to avoid unnecessary outings and requested that the national government send nurses to hard-hit areas like Hokkaido. Some leaders have even asked for military personnel.
Supplementary budgets are a time-worn tool for Japanese leaders. They proliferated after the property crash of the early 1990s, and have often become the go-to whenever there’s a major downturn. These fiscal packages are almost always padded by leftover funds that haven’t been disbursed, as I’ve written, while grants and loans from state agencies also help boost top-line numbers. The latest package is no exception: Spending will be partly financed by ¥19.2 trillion from the third extra budget, according to a final draft of the package obtained Monday by Bloomberg News.
But no amount ever seems to be enough. The government’s fiscal response to the pandemic already dwarfs measures taken after the global financial crisis, as well as the earthquake and tsunami of 2011. Now at more than 250% of GDP, Japan’s debt load is among the highest in the world and roughly twice as much as the average for advanced economies.
Suga can worry about that later. Interest rates are at rock-bottom levels and likely to stay that way, especially with the Bank of Japan pledging to buy as many bonds as needed. One big lesson from the global financial crisis of 2007-2009 is that pulling support prematurely will add to the painstaking nature of the eventual recovery.
It’s hard to disentangle the ravages of the virus from the case for stimulus and Suga’s political imperatives. Abe dominated the LDP, which has held power for almost the entire post-World War II era. The most important politicking in Japan has typically happened within the party’s ranks.
The departure of strong leaders in recent decades — Yasuhiro Nakasone, prime minister from 1982 to 1987, and Junichiro Koizumi, who governed from 2001 to 2006 — has usually been followed by a revolving door of colorless types who struggled to hold the job for more than a year or two. The five premiers who preceded Abe’s election in 2012 didn’t serve much more than a year each. Abe led the country for eight.
Will the post-Abe era be similar? Even after Suga secured backing of the LDP’s main factions, there was chatter that he would be another footnote in history. Backing in a general election wouldn’t make his position impregnable, but would help shore him up. A substantially smaller LDP majority, on the other hand, would have rivals sharpening their knives.
There’s little chance the LDP will be defeated: The opposition’s approval rating is much lower than the government’s. A less than convincing showing, however, would make Suga vulnerable to salon intrigue, which has its own momentum. Fiscal stimulus has rarely looked so attractive.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies.
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