Japan: Cabinet approves fresh stimulus package
August 2, 2016
In an attempt to boost economic growth and combat mounting disinflationary pressures, the Cabinet Office led by Prime Minister Shinzo Abe approved an economic stimulus package of JPY 28.1 trillion (USD 279 billion) on 2 August. The plan is expected to be approved in an extraordinary Diet session in September and to last for at least two years. While the stimulus package is the largest since the global financial crisis in 2009, analysts warn that only JPY 7.5 trillion of it is new spending. Much of the rest of the stimulus plan will be made up of cheap loans. As Marcel Thieliant, Senior Japan Economist at Capital Economics, points out:
“The fiscal stimulus package approved by the Cabinet today will boost growth by much less than the headline figure suggests. […] Our existing forecast is that growth will climb to 1.0% in FY2017 from 0.5% this year, but the forecast was based on earlier indications of JPY 10 trillion in extra spending. Today’s news suggest that risks to economic growth have shifted to the downside, so spare capacity will disappear only slowly. The upshot is that the Bank of Japan still has work to do to reach its 2% inflation target.”
The stimulus package includes JPY 3.4 trillion for boosting the government’s plan to address Japan’s challenging demographics, JPY 6.2 trillion for infrastructure projects, JPY 1.3 trillion for coping with Brexit-related risks and supporting small- and medium-sized enterprises and JPY 2.7 trillion for relief measures for this year’s Kumamoto earthquake and the 2011 Tohoku tsunami and tremor. Although the government will have to issue new government bonds in order to finance the plan, analysts believe that the impact to Japan’s exceedingly high public debt will be rather limited given the small size of the actual new spending.
The stimulus measures approved in August are the latest attempt to rekindle economic growth via fiscal spending and monetary easing. However, analysts highlight that the third arrow of Abe’s growth strategy, structural reforms, has fallen short of expectations and that it is crucial to reinvigorate the economy. The recent appreciation of the yen, which dipped below the 100 JPY per USD mark on 18 August for the first time since November 2013, is threatening the country’s all-important external sector. Moreover, a strong yen is lowering import costs and adding downward pressure on prices. This situation, coupled with uncertainty about global growth, is clouding the outlook for the world’s third-largest economy.