Japanese Prime Minister Shinzo Abe was under pressure to act both quickly and decisively on the economy when he was returned to office late last year. On Friday, he came through on the quickly part of the equation by announcing a stimulus package of 10.3 trillion Yen (roughly $116bn USD) less than a month after winning the election.
Whether he acted “decisively”, however, continues to be a matter of debate. Critics have already pointed out that not all the stimulus package is indeed “new” spending. They argue that as much as Y5trillion was already planned, so that truly new spending roughly accounts for only half of the total announced.
Skeptics also point out that this is not the first time that Japan has attempted to stimulate its economy over the last twenty years. In fact, the Financial Times has estimated that Japan has spent Y60trillion in 14 supplementary budgets since 1998.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
More than a decade of such stimulus announcements have had some success at fending off various global crises, including the Dot.com bubble and the much more serious 2007-2008 global financial crisis. However, the fundamental achievement of all these stimulus programs has been a worrying jump in Japan’s government debt, currently exceeding 200% of GDP, rather than any lasting turnaround in the nation’s economic performance.
The government’s latest plan is not all about stimulus spending though. Pressure on the Bank of Japan (BoJ) to become more aggressive in its approach to monetary policy is immense. Indeed, the recent election was seen by many as a vote on this issue. Abe, having won, wants the BoJ to take a much more aggressive monetary policy stance (the BoJ’s balance sheet has grown little since 2006). These include setting a higher inflation target of 2%, focusing partially on employment on top of inflation, and actively intervening in the value of the Yen.
Under threat of legislative reform to its structure and operations, the Bank of Japan has already indicated that it will heed Abe’s instructions on the inflation target, even if institutionally BoJ officials feel that demographics, not monetary policy, lie behind Japan’s chronic deflationary trends. The focus on employment may also sound familiar to those who have listened to the U.S. Fed in recent months.
The value of the Yen is key for Japan’s still important export sector, and the latest plan also calls for the Bank of Japan to actively put money into the European Stability Mechanism (ESM). Such a move should in theory help confidence in the Euro – strengthening it against the Yen. Meanwhile, any additional money supply created by the BoJ as part of the new fight to pull Japan out of its latest recession should devalue the Yen in general – giving another boost to Japan’s exporters (and of course inflation will help Japan’s ability to service its government debt).
Critics of the package also worry that public works – which form a significant portion of the measures in the plan – are doomed to be unproductive and risk creating yet more “white elephants,” alluding to infrastructure projects with no real economic value, or “bridges to nowhere,” as they were labeled during previous decades. Japan could indeed benefit from some post-Fukushima construction, yet concerns remain about how efficient spending in other geographic areas can be. Such spending will come at the expense of other economic sectors – including healthcare – which could genuinely benefit from more workers and investment.
Indeed, reform to Japan’s many “zombie” companies – those which grew inefficient during the easy money boom years and have been stuck on the life support of loan-guarantees and government support ever since – is considered by many to be more important than monetary or fiscal measures. According to the Financial Times, worldwide companies that are unprofitable go out of business within three to five years on average. By contrast, Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, has said that 70% of Japanese companies are not paying taxes because they are unprofitable. Still they remain open year and year.
Critics are also suspicious that Abe’s real goal with this stimulus announcement is not to create a sustainable growth environment, but rather to provide a very political and short term boost to the economy ahead of the July 2013 elections in the upper house of the Diet, the House of Councillors, which is currently controlled by the Democratic Party of Japan (DPJ). Of course, if Abe’s Liberal Democratic Party (LDP) is successful in taking back the House of Councillors in July it would have a freer hand in enacting real reforms to the economy.
The LDP’s track record on stimulating growth over the last two decades does not inspire much confidence absent a much bolder new strategy. The pressure on the BoJ is a welcome start, and tax reforms contained in the package also hint at some more structural changes – encouraging both investment in Japan and greater consumption among wealthy pensioners. By the end of 2013, we should have a much clearer picture of Abe’s real intentions and effectiveness.