Japan is laying the groundwork for new government spending to pre-empt any weakness in household consumption and could set an early example after the G20 called for more fiscal spending to help support the ailing global economy.
Financial market turmoil and economic contraction at the end of last year have increased pessimism about Japan’s domestic demand, but rising tax revenue and falling bond yields suggest it now has more leeway to spend.
Japanese Minister of Finance Taro Aso told reporters on Feb. 23 that he would not rule out compiling a stimulus package for fiscal 2016-2017, which starts next month.
Photo: AP
Two officials involved in fiscal policy also told reporters the government was seriously leaning toward more spending.
“If there are changes in the economy, then it’s natural to respond with an extra budget,” one official said.
“Cash handouts for pensioners have only just started, but this could be an option,” the official said, referring to a policy that is to start next month.
Timing was not yet clear on an extra package, they said, although ruling party heavyweight Toshihiro Nikai has said he suspected it was being prepared ahead of elections expected in July.
Lawmaker Masahiko Shibayama, adviser to Japanese Prime Minister Shinzo Abe, has also said the next package could include spending on childcare and healthcare for older people to reduce the burden on the working population.
Economists are taking the heavy hints.
“We are already factoring in an extra budget for money to be spent in fiscal 2017,” JP Morgan Securities senior economist Masamichi Adachi said. “Nominal growth is good, and tax revenue is nominal, so the government should have enough money to spend.”
A spending boost could also offset the coming blow from a rise in sales tax from 8 percent to 10 percent in April next year.
The government tried the same thing when it raised the tax from 5 percent to 8 percent in 2014, but its ¥5.5 trillion (US$48.6 billion) stimulus package was not enough to stop a recession.
This time, the size of the tax increase is smaller and the government has already agreed to exempt food and other everyday goods, but politicians are worried.
Japanese Chief Cabinet Secretary Yoshihide Suga on Friday last week said taxes should not be raised if they cause revenue to fall, suggesting a delay is possible.
A 2 percentage point sales tax hike would cost consumers about ¥5 trillion, so the government needs to spend ¥5 trillion to ¥10 trillion to keep consumption on track, economists say.
“The size of fiscal stimulus should be at least equally as large as last time, possibly larger, given the global situation,” BNP Paribas Securities senior economist Hiroshi Shiraishi said.
Tax revenue is closely correlated with nominal GDP growth, and on that measure Japan is set for a windfall, economists say.
Last year, Japan’s nominal GDP expanded at the fastest pace since 1994, when comparable data first became available. The Japanese Ministry of Finance expects fiscal 2015-2016 tax revenue to reach a 24-year high of about ¥56 trillion, more than their original estimate of ¥54.5 trillion.
Even if nominal growth slows, fiscal 2016-2017 tax revenue could still top the government’s estimate of ¥57.6 trillion, economists say.
And the government could bring forward bond issuance, they say, as it can borrow at no cost, given the Bank of Japan’s negative interest rate policy.
Critics say Japan already has the world’s worst debt burden at twice the size of its economy and runs large budget deficits, so it risks triggering a downgrade by credit rating agencies.
Fiscal doves argue that weakness in the world economy justifies it, and in any case bond markets are immune to ratings agencies while the central bank is pumping out money through its quantitative easing program.
At a weekend summit, the G20 sided with the doves by calling for more fiscal spending and less reliance on monetary policy to help the fragile global economy, which some investors say has reached its limit after years of quantitative easing and negative real interest rates.
Central bank Governor Haruhiko Kuroda has supported that position, saying each country has agreed to use all available policy tools.
“This may not influence Europe, but China, South Korea and other Asian countries could follow Japan’s spending approach,” Mitsubishi UFJ Morgan Stanley Securities senior economist Hiroshi Miyazaki said.
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