Shinzo Abe's fiscal stimulus not impressive enough for sceptics

It took barely an hour for experts to begin to pick holes in the Japanese premier Shinzo Abe’s latest fiscal stimulus package.

Launched this month to much acclaim in Tokyo’s political circles (and greeted with a mixture of scepticism and apathy almost everywhere else), the plan marks the latest attempt by Mr Abe to inject much-needed growth into Asia’s second-largest economy.

The plan’s top-line stats are impressive. Come next month, Tokyo will begin to issue billions of dollars’ worth of 40-year bonds, with the proceeds to be used to patch up the social security system (by extending financial support to pensioners), provide impetus to public works projects (notably by speeding up the completion of a superfast maglev train line linking the capital with Nagoya and Osaka), and accelerate the reconstruction of parts of north-eastern Japan devastated by the earthquake and tsunami in 2011.

No one doubts that Japan needs a good, solid kick in the rump. Economic momentum has remained elusive for the better part of a quarter-century, during which time the national debt has ballooned. Mr Abe returned to power in 2012, having spent a year at the helm between 2006 and 2007, pledging to ignite inflation and generate growth by wielding “three arrows”: fiscal stimulus, monetary stimulus and structural reforms.

So far, at least, the first two of those factors have exerted little credible long-term effect. In its updated World Economic Outlook, issued last month, the IMF tipped the economy to expand by 0.3 per cent this year and by just 0.1 per cent next year.

Announcing the plan, Mr Abe heralded its three most visible headline statistics. The new package, he claimed, was the third-largest stimulus plan launched by Japan since the early 1990s. It would inject ¥28.1 trillion (Dh1.03tn) in fresh debt-related capital directly into the stumbling economy, and in turn would finally kick-start growth, boosting annual gross domestic product by 1.3 percentage points.

Not so fast, analysts and experts replied. In a research report issued on August 2, the same day as the stimulus plan, HSBC noted that while the headline figure was “impressive”, just ¥7.5tn of the total would be “fresh­water” spending, as it is known in Japan – genuine new capital investments by local and central government. That would make it only the eighth-largest stimulus package unfurled by Tokyo over the past quarter of a century. And of that smaller total, just ¥4.6tn is earmarked for use in the current fiscal year to the end of March next year, further eroding the plan’s near-term impact.

Even the title of the HSBC note (“Same, same, and not even that different”) pointed to the wider sense of disappointment felt by many if not most financial observers.

The UK bank dismissed the plan as “[unlikely] to provide anything more than a temporary lift to growth”. SMBC Nikko Securities said the package would boost GDP growth by 0.4 percentage points in the year to end-March 2017, and by just 0.04 percentage points over the next 12 months.

Nomura’s Japan chief economist, Takashi Miwa, wondered whether the new measures would be enough to boost productivity and return the economy to growth. “Unfortunately,” he said, “we should be suspicious about that.”

There is good reason to doubt Mr Abe’s ability to squeeze a little extra output from the current system.

Berenberg Capital Markets described the latest fiscal push as “just another in a long series of old-school fiscal deficit spending attempts to stimulate the economy that does not address the real sources of Japan’s ongoing malaise”.

It said that despite years of rock-bottom interest rates and huge monetary stimulus, the economy remained the same size, in nominal terms, as it was in 1999. It faces a host of current headwinds, from the Brexit vote in June, to the ongoing travails of the euro zone, to uncertainty over China’s slowing economy. At home, inflation, having ticked up a little in recent years, is again scraping along at close to zero.

Fail, and Mr Abe could be forced to push through a slew of new and unpopular structural reforms. Since returning to the premiership, he has boosted corporate governance, taken on vested interests in the sclerotic agricultural industry, pushed through rules to liberalise the energy sector and championed the 12-nation Trans-Pacific Partnership.

But the 61-year-old has shied away from a host of other structural reforms that would, experts say, hand the economy genuine and lasting impetus.

The corporate rate of tax is slowly inching down (it stands at 31.33 per cent), yet it remains one of the highest in the world. Then there is labour reform, or the lack thereof. Japan is a land divided between permanent (typically older) and temporary (mostly young) employees: reduce the social benefits extended to the former and give the latter more reason to work harder and productivity would soar, the IMF says. A more honed focus on structural reforms would, HSBC says, help “to coax extra capex from corporations currently holding vast piles of cash on the sidelines”.

That is not to say that the fiscal stimulus plan unveiled in the first week of this month is destined to prove to be a waste of money. A sizeable slice of the new spending is being earmarked for new cruise ship terminals, accommodating a surge of Chinese travellers and offering a much-needed fillip to the tourism sector. Up to ¥3.4tn is being set aside to subsidise child or elderly care, helping to reduce labour market pressures.

And Mr Abe’s new plan does have its supporters. “We see the stimulus package to be a positive development that increases [not guarantees] the probability of success in reflating the Japanese economy,” says Paul Gruenwald, the chief Asia-Pacific economist at ratings agency Standard & Poor’s. With monetary and fiscal policy working in harmony, there is, he says, a greater chance of the government hitting its 2 per cent inflation target “and generating sustained, modest, and positive nominal GDP growth”.

Mr Abe’s popularity has since 2012 been based on his willingness to pursue aggressive and unorthodox fiscal policies, in an attempt to return growth, productivity and inflation to Asia’s slumbering economic behemoth. He has succeeded, up to a point.

But the gloss and hope is starting to fade. Mr Abe needs this well-intentioned but ho-hum fiscal stimulus package to succeed.

If it does not, he may well find himself running out of road.

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