Mount Fuji, Japan

Japan Fiscal December 2020

Japan: Government announces third stimulus package to bolster economic recovery

On 8 December, the government unveiled a JPY 73.6 trillion (around USD 700 billion) stimulus package in a further effort to soften the economic fallout from the coronavirus pandemic, with around JPY 40 trillion in direct fiscal spending. The injection marks the third package for 2020 and the first approved since the start of the Suga administration in September. Although the headline value of the package is notably below the JPY 117.1 trillion figures from each of the April and May packages, when looking at direct spending measures the three are fairly similar in scale. The move should go some way towards supporting the economy and calming investors’ nerves amid a surge in Covid-19 infections during November and into December. That said, the intensifying health crisis could blunt the impact of some of the measures.

The package consists of three main pillars, namely structural reforms, measures to prevent the spread of Covid-19—including strengthening the healthcare system and preparing for mass vaccination—and increased funding for natural disaster resilience. Of the three pillars, around 70% of the total budget goes towards structural reforms that aim to transform the post-Covid-19 economy, particularly by promoting digitalization and green initiatives—both key policy areas for Suga’s administration. Meanwhile, the popular Go To Travel subsidy scheme will be extended until mid-2021, although it has been temporarily suspended for two weeks over the new year holiday period in an attempt to stem the recent spike in daily infections.

Taken together, the fiscal response of the Japanese government should bolster a strong economic recovery in 2021. However, a continued worsening of the pandemic domestically presents a short-term risk to the outlook, at least until widespread vaccination becomes available. In particular, the subsidy measures announced in the stimulus package could struggle to spur demand if elevated infection rates keep consumers and firms from spending.

Regarding the potential impact of the stimulus measures, Hiromichi Shirakawa and Takashi Shiono, economists at Credit Suisse, commented:

“Our initial assessment is that outlays with potential to have a measurable short-term economic impact—such as additional public works spending and the extension of “Go To” campaigns—will be limited to around ¥6 trillion to ¥7 trillion, or boosting real GDP by somewhere in the order of 0.2%–0.4% over the next 15–18 months, other things being equal.”

Naohiko Baba and Yuriko Tanaka, economists at Goldman Sachs, noted:

“We expect the other two packages this year (budgetary provisions totaling ¥58 tn) to boost GDP by around ¥10 tn (approximately 1.9% of the 2020 nominal GDP forecast). The latest new package looks to be less skewed to income transfers, and has higher proportion of spending to be accounted in GDP, compared to the previous two supplementary budgets. That said, we think the economic impact of the latest package will be much smaller than 3.6% of GDP (approx ¥20tn), quoted by PM Suga.”

Meanwhile, analysts at Nomura have doubts over the efficacy of some of the measures, stating:

“The specific economic reform measures included appear to be heavy on the establishment of funds and the provision of subsidies. It is not at all clear how effective these programs will actually be in inducing corporate fixed investment and drawing out other sorts of demand. […] We see nothing that warrants a significant change to our outlook for the economy.”

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