Japan: Fiscal Stimulus For Quick Rebound

Shortly after being installed, the Abe government presented a supplementary budget worth JPY 10.3 trillion (or 2% of GDP). Taking local government and private sector contributions into account, it would reach JPY 20.2 trillion.

Based on past experiences, the effect on GDP growth might be limited to around 0.5 percentage point in 2013 and 0.2 percentage points in 2014. The package does not address structural reforms necessary to lift the economy’s growth potential and leads to the postponement of fiscal consolidation.

Last month, the LDP won a landslide victory and its leader Shenzo Abe became the prime minister. The LDP won 294 seats of a total of 480 seats in the Lower House. Together with the 31 seats of coalition partner New Komeito, the government has a two-thirds majority. Even though the government does not have a majority in the Upper House, the ample majority in the Lower House will allow it to overrule the Upper House in certain matters.

The government might gain the majority in the Upper House after the upcoming election in July. To improve the chances of victory, the authorities have any interest to boost growth in the coming quarters. The state of the economy is also a determining factor for the implementation of the VAT hike from 5% to 8% from April 2014.

In addition, the government is likely to increase its influence on monetary policy. It is currently negotiating with the Bank of Japan (BoJ) on a new joint strategy to get the economy out of deflation. This is likely to be presented after the next BoJ Policy Board meeting on 21 and 22 January.

An essential point is the inflation target, which might be lifted from 1% to 2%. In addition, BoJ policy might change by the replacement of Governor Masaaki Shirakawa and his two deputy governors, who will reach the end of their terms this year. They are likely to be replaced by more “dovish” bankers.

An impressive fiscal boost…
During the election campaign the LDP had promised to revive the ailing economy by a stimulus plan. The party did not disappoint its voters. Already in early January, the incoming Abe government presented a supplementary budget worth JPY 10.3 trillion (or 2% of GDP). Taking local government and private sector contributions into account, it would reach JPY20.2 trillion. The stimulus package is among the largest on record.

By Raymond VAN DER PUTTEN

To Read the Entire Report Please Click on the pdf File Below.