Japan’s stimulus package: will it work?

The Bank of Japan...epa02584125 A Japanese national flag is seen on the roof of the Bank of Japan (BOJ) building in Tokyo, Japan, 15 February 2011. The Bank of Japan's policy board announced it will keep its interest rates unchanged and upgraded its economic view of the world's third economy for the first time in nine months. EPA/FRANCK ROBICHON©EPA

Japan has launched a new fiscal stimulus that it bills at a massive ¥28.1tn ($ 276bn). The package marks a shift back to loose fiscal policy — but the economic impact is likely to be less than the headline would make it seem.

Why is Japan launching a new stimulus?

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Since 2014, Japan’s economy has been going nowhere fast, with sluggish consumption, weakness in exports to China and now the shock of Brexit. Inflation has dipped back below zero.

Shinzo Abe, the prime minister, has been sounding the alarm about global growth for a while, urging fellow global leaders to mount a new stimulus at the G7 he hosted in May.

Having learned from his disastrous decision to raise consumption tax to 8 per cent in 2014, which plunged the economy into recession and hurt his approval ratings, Mr Abe is putting robust growth ahead of any attempt at fixing Japan’s public finances.

Does it mean Abenomics has failed?

Not as such. Mr Abe came to power in 2012 promising to use “three arrows” — monetary stimulus, fiscal stimulus and structural reform — to boost economic growth, push inflation to 2 per cent and tackle public debt.

He has not met those objectives. But on most measures, such as growth in nominal output or the health of the labour market, the economy has performed better than before Mr Abe came to power. The public has rewarded him with repeated electoral victories.

A big reason for Japan’s slow progress was the 2014 tax rise, a fiscal contraction rather than the stimulus Mr Abe promised. Launching a fresh stimulus marks a return to the original plan.

Is the ¥28.1tn new money?

No. Much of it is loans that might well have happened anyway. In the long list of programmes, for example, is a measure for the Development Bank of Japan to support safety doors on railway platforms.

The new “fiscal measures” amount to ¥13.5tn. Of that, ¥6tn will involve the government borrowing and lending the money on to finance infrastructure, such as a new magnetic levitation railway line from Tokyo to Osaka.

The “fresh water”, as new government spending is known in Japan, therefore comes to ¥7.5tn. Of that, ¥6.2tn is from central government. Of that, ¥4.6tn is budgeted for the current fiscal year.

Will it work?

The amount of fresh water is less than the ¥10.3tn in Mr Abe’s fiscal stimulus when he came to power in 2012. But it is sizeable compared with recent years and should add to demand over the next 18 months.

Hiroshi Ugai, an economist at JPMorgan in Tokyo, said the details were “slightly supportive” relative to his growth forecasts of 1.1 per cent for 2016 and 0.8 per cent for 2017. Those forecasts are higher than Japan’s long-run growth potential, suggesting an ever tighter jobs market, and upward pressure on inflation.

Much will depend on the details of how the money is spent. The maglev loans are unlikely to do anything for short-term demand — the project is already under way. Cash for pensioners and low-income families, on the other hand, could make a big difference.

Where does this leave the Bank of Japan?

The yen weakened during July because of speculation Japan might launch a new kind of stimulus, so-called “helicopter money” or “debt monetisation”, with the BoJ essentially printing cash for the government to spend.

Some of Mr Abe’s advisers, such as Koichi Hamada, the former Yale professor, have voiced support for the idea although BoJ officials say it is still a remote and unlikely prospect. Instead, the government and central bank are trying to show close co-ordination, in line with the original Abenomics manifesto.

The result so far is a modest extra monetary and fiscal stimulus. Market disappointment has pushed the yen up to ¥101.8 against the dollar. That means the BoJ will remain under pressure to ease more later in the year.

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