What’s the reasoning behind Japan’s stimulus?
By Oren Laurent
President, Banc De Binary
The Japanese cabinet approved an 18.6 trln yen ($182 bln) package on Thursday to bolster the economy, amid budding skepticism about the long-term success of the government’s monetary policy. What is the thinking behind it and what impact will it have?
The package includes increased support to women and the elderly, more reconstruction work after the March 2011 earthquake, and the building of new infrastructures for the 2020 Tokyo Olympics – measures which Prime Minister Shinzo Abe hopes will boost the economy prior to a national sales tax increase in April. According to the Cabinet, who are likely being optimistic, the spending of 5.5 trln yen will add 1% to Japan GDP and create around 250,000 jobs.
Thursday’s proposal “includes steps to boost capital expenditure for the future and ensure the economy stays in a positive cycle," Abe explained to businessmen and economists. "If companies invest more and wages rise more, then the positive cycle materializes."
The size of the package is in line with Abe’s 20 trln yen spending earlier in the year as part of his pledge to end 15 years of falling prices and meager growth. On the one hand, his policies have made an impact, and weakened the yen, making Japanese exports attractive. It is also likely that domestic demand will rise and economic growth will enjoy a boost in the fourth quarter before the sales tax increase.
However, many analysts are starting to question whether the continued stimulus and huge short-term spending sprees are healthy for long-term economic success. In the third quarter, the country’s growth slowed, revealing a 1.1% annualised growth, substantially lower than the 1.9% estimation. Plus, its current account unexpectedly fell into deficit in October, for the first time since January. The finance ministry admitted to a 128 bln yen shortfall ($1.2 bln) in its broadest trade gauge. Some critics have voiced the opinion that the building boom is a throwback to the difficult 1990s, when desperate regions across the country tried to build their way back to prosperity.
As I see it, the real problem lies in poor business spending, which has its roots in a lack of confidence. Abe can tell businesses to raise their workers’ wages and to have the faith to invest, but he can’t force them to do so. His high spending and investment, coupled with the Olympic bid helped to boost sentiment and stocks in the short-term, but it hasn’t yet brought sustained long-term results.
Businessmen will be asking what is different this time around. And I bet Abe would struggle to give a satisfactory answer. Higher wages are easier to justify in theory than to implement in practice. Yet, if there was a way to persuade all companies to invest at the same time, if the fourth quarter figures do give genuine reason for hope, then it would benefit all involved. Simultaneous action will be Japan’s best hope for generating the results needed for further confidence and investment measures, which would in turn create the possibility for a more stable future economic expansion.
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