Prime Minister Shinzo Abe’s plan for “comprehensive, bold” fiscal spending this fall isn’t getting a warm reception among economists who say that while a stimulus package may temporarily bolster the economy, they’d prefer he focus on long-term structural reforms.
One worry among analysts is that a significant spending boost would further add to Japan’s public debt burden, without necessarily shifting the economy’s slow-growth path — which some see as Japan’s natural state at the moment.
“If ever there’s a country that doesn’t have fiscal space, it’s got to be Japan,” said Desmond Lachman, a resident fellow at the American Enterprise Institute in Washington, a research institute that advocates free-market policies. Japan has “a high public debt, they’ve got a large budget deficit, their savings rate is going down because their population is getting older, so to me this makes absolutely no sense to increase the budget deficit further through deficit spending.”
In the days after Abe’s ruling coalition won a big victory in the upper-house election on July 10, he ordered that a stimulus package be compiled as he seeks to again revive the economy. He specified spending on infrastructure. And days after the win, Abe met former Federal Reserve chairman Ben S. Bernanke and told him he wants to speed the nation’s exit from deflation, underscoring his commitment to stimulus.
The government is discussing supplementary spending of about 3 trillion yen ($28.3 billion) for the current fiscal year, according to two officials familiar with the talks. Chief Cabinet Secretary Yoshihide Suga in a recent interview ruled out issuing deficit bonds to fund a stimulus package, hinting at using construction bonds for longer-term investments.
The markets have been expecting some spending package from the government. Partly because of speculation about the stimulus plan, Japan’s Topix index has risen 9.5 percent since the election. During the campaign Abe pledged to work toward raising Japan’s gross domestic product to 600 trillion yen from 500 trillion yen, and a well-constructed initiative could provide a boost for GDP.
Yet economists and analysts say they aren’t convinced of the need for fiscal stimulus now or whether it would do much to reinvigorate Japan’s economy. Several said they’d rather see Abe focus on his own third ”arrow” of Abenomics — making structural reforms to the economy. Some of their concerns about deploying a large stimulus package:
Koya Miyamae, an economist at SMBC Nikko Securities Inc., worries that fiscal stimulus policies could distort the economy by providing a big temporary boost that could later lead to a sharp contraction, creating appetite for yet more stimulus. “The economy is crawling sideways. It isn’t improving, but it isn’t getting worse. If you introduce these policies now it’ll create distortions,” he said.
With some analysts seeing Japan’s potential growth rate at somewhere between zero and 0.5 percent, there is a case for arguing that it’s not worth pursuing a fiscal stimulus package.
“Considering Japan’s fiscal position and the balance of supply and demand in the economy, I don’t really think it’s necessary,” said Junko Nishioka, chief economist at Sumitomo Mitsui Banking Corp.
Shinichi Ichikawa, chief market strategist at Credit Suisse Securities Ltd., said he’d rather see the government work on economic reforms “rather than pursue policies focused on near-term conditions.” He emphasized making greater use of foreign labor and overhauling Japan’s work and education systems.
Not everyone is cool to the idea of fiscal stimulus. Francis Chan, a senior industry analyst for Bloomberg Intelligence, wrote in a note that the package could boost stocks for major banks and encourage loan growth. Talk of the stimulus also has helped weaken the yen, which has fallen more than 5 percent since the election, providing relief to Japanese exporters.
Despite market enthusiasm, however, economists largely remain cautious. “Market perceptions will change,” Lachman said. “Who knows what happens elsewhere in the world? Suddenly there might become more concern about countries that have high deficits.”