Japan: Economic outlook following recent elections
November 30, 2021
Japan went to the polls to elect all 465 members of the powerful lower house of the National Diet at the end of October. The ruling Liberal Democratic Party (LDP) defied gloomy pre-election expectations and won 261 seats, surpassing the 233 required to retain its majority and ensuring that economic policy will remain relatively unchanged. Moreover, along with its junior partner Komeito, the ruling coalition won 293 seats, comfortably maintaining its grip on power and guaranteeing that Fumio Kishida would be reelected as prime minister at a special Diet session on 10 November. In contrast, the leading opposition party, the Constitutional Democratic Party (CDP), won only 96 seats as it failed to capitalize on tepid public support for Kishida and widespread dissatisfaction with the ruling party’s handling of the pandemic.
As the new PM, Kishida will be charged with bolstering an economy that returned to contraction in Q3 following extended state of emergency measures and supply chain bottlenecks. The worse-than-expected downturn led Kishida to present a record fiscal stimulus package in late November—something the PM had promised when he won the LDP leadership race at the end of September—with spending totaling nearly JPY 56 trillion (USD 490 billion). The package will contain cash handouts of JPY 100,000 (roughly USD 900) for families with young children, subsidies for SMEs hit hard by the pandemic, and sizable funding to reinforce health services and improve infection prevention measures.
Regarding longer-term economic policy, the LDP’s manifesto reiterates the Suga-era commitment to promoting digital transformation and seeks to maintain the current accommodative monetary stance—the new government and the Bank of Japan confirmed their pledge to cooperate to achieve 2.0% inflation in early November. Moreover, the manifesto mentions “new capitalism” policies, which could include strengthening support for housing and education expenses, raising some public-sector wages and offering tax breaks for companies that provide wage hikes. November’s stimulus package allocated around JPY 20 trillion (USD 180 billion) to such policies.
Looking ahead, Alvin Liew, senior economist at United Overseas Bank, commented:
“Post-election, we view the outcome as one of political stability and bodes well for Kishida and his near-term approval rating among the Japanese public. While it is still early days, the current outlook seems to favor Kishida outlasting the 1-year longevity of his predecessor. […] In terms of the economic outlook, we continue to expect Japan to keep to its current GDP growth trajectory in H2 2021 and we maintain our full-year GDP growth at 2.5% in 2021, compared to the 4.7% contraction in 2020. Growth is thereafter expected to ease further to 2.2% in 2022.”
Meanwhile, Naohiko Baba, economist at Goldman Sachs, stated:
“We think the impact [of the stimulus package] is likely to be far smaller than the government estimate of around JPY 30 trillion (5.6% of GDP) for the following reasons: (1) the majority of the cash payouts could end up in savings, (2) about 30% of the Covid-related emergency funds so far has not actually been used, and (3) public works, which has a strong boosting impact on GDP, is relatively limited in size in this package, and (4) the package includes various ‘funds’.”
Author: Stephen Vogado, Economist