Yesterday, Japan’s Prime Minister Shinzo Abe announced a much anticipated fiscal package designed to try and pull the country’s economy out of its multi-decade long economic malaise.
Prime Minister Abe’s fiscal package amounts to ¥28 trillion (Abe has said ¥27 to ¥28 trillion) or around 6% of GDP, which sounds chunky, but according to Frederic Neumann, co-head of Asian Economics Research at HSBC the actual economic impact felt from the spending is bound to be smaller and weaker than the headline figure.
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Of the ¥28 trillion package, Abe claims ¥13 trillion will be earmarked for “fiscal spending” what this means isn’t exactly clear. Neumann believes around half of this total will be used for loan guarantees with the rest earmarked for stimulus spending:
“It’s not clear what “fiscal spending” really means, though we doubt it is all “fresh water” (i.e. extra spending that will stimulate growth) since it will probably include loan guarantees. We continue to expect the “fresh water” component to be 6-8 trillion yen (1.5%-ish of GDP), which is sizeable. But it looks like this will be spread out over several years, rather than hit the economy in one swoop.”
What form of the “fresh water” will take is unknown as of yet but Neumann writes that there has been some speculation the stimulus could include extra infrastructure projects and shopping vouchers. If the government does decide to distribute cash or vouchers to consumers, it could mark the first such instance of “helicopter money” in a developed economy.
The figures show that infrastructure spending would be the best option regarding the fiscal multiplier. Japan’s cabinet office estimates that the fiscal multiplier on extra government investment spending is slightly above one (one yen of spending increases GDP by more than one yen), whereas the multiplier for consumption incentives is much lower at around 0.3 to 0.6.
As noted above, a significant portion of Abe fiscal stimulus may be devoted to loan guarantees for long-term projects. Neumann writes that it’s not clear if such loan guarantees will make a difference in a world where the cost of capital is essentially zero funds are readily available. Subsidies to private companies could also form part of the package but once again is questionable if these will actually stimulate economic activity.
Put simply, Neumann isn’t overly excited about Japan’s new fiscal bazooka, in fact, towards the end of the flash research note he strikes an incredibly pessimistic tone writing:
“We’ve been here before, it’s not Japan’s first fiscal stimulus program…History suggests that that their impact quickly fizzles. Sure, this one might be slightly larger, but why should investors get overly excited? It’s more of the same, after all…especially if it’s not accompanied by structural reforms.”
However, there could be an entirely different outcome if the Bank of Japan decides to double up the fiscal package with substantial easing on its own, a decision on which is expected to come later today.