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Abe stimulus — Japan returns to loose fiscal policy

Abe stimulus — Japan returns to loose fiscal policy

JAPAN has launched a fiscal stimulus that it bills at JY28.1tn ($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 staging new stimulus?

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.

Prime Minister Shinzo Abe has been sounding the alarm about global growth, 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 8pc 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.

So has Abenomics 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 growth, push inflation to 2pc and tackle public debt.

He has not met those objectives. But on measures such as growth in nominal output or the labour market, the economy has performed better than before Mr Abe came to power. The public has rewarded him with 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 JY28.1tn new money?

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

The new ‘fiscal measures’ amount to JY13.5tn. Of that, JY6tn will involve the government borrowing and lending the money on to finance infrastructure, such as a new maglev (magnetic levitating) railway line from Tokyo to Osaka.

The ‘fresh water’, as the new spending is known, comes to JY7.5tn. Of that, JY6.2tn is from central government. Of that, JY4.6tn is for the current fiscal year.

Will it work?

The amount of fresh water is less than the JY10.3tn in Mr Abe’s original fiscal stimulus 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 1.1pc for 2016 and 0.8pc 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 under way. Cash for pensioners and low-income families, on the other hand, could make a big difference.

Where does this leave the BoJ?

The yen weakened during July because of speculation Japan might launch a stimulus, so-called ‘helicopter money’ or ‘debt monetisation’, with the Bank of Japan printing cash for Tokyo to spend.

Some of Mr Abe’s advisers support the idea but BoJ officials say it is still unlikely. Instead, the government and central bank are trying to show close co-ordination, in line with the original Abenomics manifesto.

The result is a modest extra monetary and fiscal stimulus. Market disappointment has pushed the yen up to JY101.8 against the dollar.

Published in Dawn, Business & Finance weekly, August 8th, 2016

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