After the ruling party scored a convincing victory in Sunday’s upper house election, the focus now turns to Japanese Prime Minister Shinzo Abe’s plans for fiscal stimulus.
Details of the scale and financing of the package remain unclear, though Abe pledged to take “broad, bold” measures to support the economy on June 1 as he announced a delay to a planned sales-tax increase.
The Nikkei Shimbun reported that Abe would today order the compilation of a stimulus package, which one of his advisers has said should be ¥20 trillion (US$196 billion) in the current fiscal year.
Abe on Sunday night repeated his pledge for action on a stimulus package while declining to comment on the amount of such stimulus.
Lower-than-projected tax revenue and a ¥778 billion aid package after a series of earthquakes in the Kumamoto area in April means there is not a lot of leftover money in the budget to finance stimulus.
Abe also made it clear that he would attempt to spur economic growth through spending.
The world’s third-largest economy has struggled to find a sustainable growth strategy and has contracted in five of the past 10 quarters. A fiscal package could provide a welcome boost, yet Japan must also find a medium-term path to fiscal consolidation. Stimulus, if funded by debt issuance, would make that more difficult, analysts said.
Fiscal stimulus can aid consolidation, said Matthew Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies in Washington, by expanding the GDP enough to bring down the debt-to-GDP ratio.
“The challenge is consistency,” Goodman said in an e-mail before Sunday’s election.
“In the past, the government of Japan has sometimes switched too quickly from stimulus to austerity, which can undermine the initial effects of the package,” he said.
Abe faces no shortage of skeptics as he makes the case for a more active policy. One concern is that stimulus might become commonplace.
“The economy isn’t improving, but it isn’t getting worse,” said Koya Miyamae, an economist at SMBC Nikko Securities Inc in Tokyo. “In a stable economy, if you introduce big amounts of stimulus, you’ll have to keep up that level of spending.”
Others see stimulus helping, but doubt there would be an appreciable economic impact.
“It’s better than doing nothing, but it’s difficult to think this will lift up the economy,” Masaki Kuwahara, senior economist at Nomura Securities Co in Tokyo, said in a telephone interview.
The IMF also recently chimed in, noting in its annual economic assessment of Japan that the “stop-go nature of fiscal policy, with yearly supplementary budgets,” is contributing to policy uncertainty. It would be better, the IMF said, to have more predictable fiscal policy timelines, including regular and gradual increases in the consumption tax.
Spurring sustained growth is likely to have political benefits for Abe, who will have to call an election in the more powerful lower house in the next two years.
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