Mount Fuji, Japan

Japan Fiscal November 2022

Japan: Japanese government unveils JPY 29.1 trillion (USD 200 billion) supplementary budget in November

On 8 November, the Japanese government unveiled a JPY 29.1 trillion (USD 200 billion) supplementary budget—worth around 5% of GDP.

Around 25% of it will be spent on shielding businesses and households from rising inflation via electricity and fuel subsidies, and measures to boost wages.

Additional funds will be spent on initiatives to boost wealth equality, disaster resilience and national security.

Impact on inflation: The Japanese government has claimed that the budget will bring down inflation by 1.2 percentage points between January and September next year. That would be a significant amount considering that Japan’s inflation is projected to average below 2% in that period. However, this estimate may be excessive as all households will benefit from the subsidies regardless of income level, likely stoking domestic demand and thus price pressures in areas not covered by the subsidies.

Impact on economic growth: The budget should boost economic growth through higher private and government spending. That said, assessing the exact effect of the budget on economic growth is difficult, as the Japanese government and the Bank of Japan have given wildly different estimates for the size of the output gap—the difference between actual and potential GDP. If the output gap turns out to be small, the effect of the budget on growth could be more limited as the economy runs into supply constraints. Moreover, much will depend on whether consumers decide to spend or save the fiscal windfalls that subsidies provide.

Impact on monetary policy: Most of the budget will be financed by issuing bonds. As a result, the budget makes it even more certain that the Bank of Japan will persist with its ultra-accommodative monetary policy ahead to keep public borrowing costs down.

Impact on financial stability: The downfall of the UK’s Prime Minister Liz Truss suggested that unfunded government spending is dangerous when a country has a large debt pile with weak growth prospects—a description that fits Japan well. Nonetheless, Japanese long-term bond yields have barely shifted since the budget was announced. Japan’s economy is more stable than that of the UK, and inflation is lower—putting less pressure on long-term yields. Moreover, the Bank of Japan, which owns nearly half of all outstanding government bonds, is likely to intervene should rates rise significantly.

Analysts at the EIU commented on prospects for fiscal consolidation:

“According to the extra budget, only ¥4.7trn of the additional fiscal expenditure will be drawn from the government reserves funds, with ¥22.85trn to be funded by issuance of new government bonds. This will further widen the fiscal deficit, making the government’s plan to eliminate the shortfalls on the fiscal account by the end of this decade unlikely to be achieved.”

Analysts at Nomura said:

“Given current conditions, the government probably does not need to use large-scale economic measures to stimulate the economy. Rather than such economic stimulus, measures to counter rising prices should be applied to strengthening the safety net of support for low-income households and micro-enterprises, which are being hit particularly hard by rising prices.”

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