Japan’s Prime Minister Shinzo Abe has approved a fiscal stimulus package in an attempt to boost the country’s economy, but some analysts aren’t convinced this is the solution.
Investor fears
Writing for
Reuters, Tetsushi Kajimoto explains that the stimulus package, worth ¥13.5tn (£99.7bn), includes ¥7.5tn in spending by the national and local governments and ¥6tn from the Fiscal Investment and Loan Program, not included in the Government’s general budget.
Prior to this move, Japanese Government bonds saw their “worst sell-off in more than three years”, writes Kajimoto, as investors held back amid fears that the Bank of Japan (BoJ) might slow the pace at which it bought government bonds.
Kajimoto says the BoJ disappointed markets on Friday by failing to increase bond purchases and left traders unsettled after it announced a policy review for September. But the Government believes the stimulus, to be implemented over several years, will push up real gross domestic product by around 1.3% in the short term.
Reuters article
Insufficient policies
However, Citigroup Chief Economist Willem Buiter has said Abe’s fiscal policies are “insufficient” to boost the economy, which is suffering from considerable deflation. He told
CNBC: “Japan has to get serious about sustained, large-scale, continuing stimulus until inflation hits the 2% target.”
“They have the tools to stimulate demand for goods and services directly in the form of childcare and increased pensions but it has to be on a scale sufficient to do the job,” he told
CNBC’s news and talk show,
Squawk Box.
He continues with the point that although the BoJ has increased asset purchases, which “make it possible for authorities to cut taxes – Japan still has a 35% corporate income tax rate – [the] authorities are reluctant to aggressively fill the additional fiscal space created”.
He suggests opening up tradable and non-tradable services to competition and foreign direct investment by deregulating them, which he believes could boost GDP by 40%. But he says this won’t happen as it would damage “electorally sensitive interests”.
CNBC article
Frequent path
Writing for
Bloomberg, Enda Curran and James Mayger explain that Abe’s ambition of boosting the economy in this way is a route taken many times before, marking the “26th dose of fiscal stimulus since the country’s epic markets crash in 1990”.
35%
The corporate income tax rate in Japan
The pair says that Japan has had extra budgets similar to the one proposed by Abe since 1993, yet it has still had to deal with six recessions, “an entrenched period of deflation, soaring debt and a rapidly aging population that has left the world’s third-largest economy still struggling to get off the floor”.
However, few market analysts are convinced the fiscal measures will be enough to adequately stimulate the economy, according to the piece, which says that, based on past experiences, the “initial sugar hit” will do little to fix the economic problems.
Referencing Goldman Sachs research, the article says that markets gave up their gains in the first month after cabinet approval in 18 of the 25 packages since 1990.
“We don’t need any fiscal stimulus. What we need is enhancement in productivity, thereby raising potential growth,” former BoJ official Hideo Hayakawa said.
Bloomberg article
Seen a blog, news story or discussion online that you think might interest CISI members? Email jules.gray@wardour.co.uk.