As Japan faces a politically eventful year, calls are growing within the government and ruling parties to compile stimulus steps to support the flagging economy ahead of a summit and upper house election.
Though doing so would go against Japan’s efforts to restore fiscal health, a pledge by Group of 20 economies to “use fiscal policy flexibly” is likely to be cited in support of stimulus at a time when global growth is threatened by recent market turmoil.
Prime Minister Shinzo Abe has said that in the run-up to a Japan-hosted Group of Seven summit in May, he will launch talks with experts from home and abroad to analyze the world economy and study ways to stabilize financial markets.
“We must closely watch developments in the world economy that has entered a new phase,” Abe said, referring to volatile financial markets amid concern about the slowdown of the Chinese economy, falling oil prices and rising U.S. interest rates.
As the G-7 president this year, Japan “would like to contribute to sustainable and robust growth of the world economy,” the prime minister said Tuesday, heightening the view that the government is eyeing fiscal spending to shore up the world’s third-largest economy.
“The meeting could be used as an excuse to compile an extra budget or forgo a sales tax hike to show the government made the decision after carefully hearing discussions by experts,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co.
The gathering will come after the G-20 finance chiefs agreed at their latest meeting Feb. 26-27 to “use all policy tools—monetary, fiscal and structural—individually and collectively” to strengthen growth, investment and financial stability.
Hit by slumping private consumption and exports, Japan’s economy shrank an annualized 1.4 percent in the October-December period in real terms from the previous quarter, while still weak consumption may prevent the economy from rebounding in the next quarter.
Just as the G-20 economies argued that “monetary policy alone cannot lead to balanced growth,” Masazumi Wakatabe, a Waseda University professor and advocate of large-scale monetary easing, called on the state to spend more money to boost demand.
In addition to freezing the consumption tax hike slated for April next year, public money should be used to invest in infrastructure and human resources, Wakatabe said.
“There is a persistent lack of demand,” Wakatabe said. “This can be solved by utilizing both monetary and fiscal policy,” he said, calling for public money to be used for such purposes as repairing infrastructure, enhancing education and reducing poverty.
There are also calls within the government and ruling parties to utilize a fiscal stimulus ahead of the House of Councillors election this summer.
Etsuro Honda, Abe’s special economic adviser, said in a recent interview with Kyodo News the government needs to compile “stimulus measures worth at least 5 trillion yen ($44 billion),” while postponing by two years the 2-percentage-point consumption tax hike.
A senior official of Abe’s ruling Liberal Democratic Party has made no secret of his desire to hammer out steps to cope with the global economic slowdown, even after the Diet enacted January a 3 trillion yen extra budget with focus on enhancing welfare services and making the farm sector more competitive.
“I expect Prime Minister Shinzo Abe to take aggressive economic measures, including fiscal spending,” Toshihiro Nikai, chairman of the LDP’s General Council, said on the party’s Internet program on Feb. 24. “It is important to actively carry out drastic policies.”
But additional fiscal spending raises the risk of further delaying Japan’s fiscal consolidation, as the government tries to achieve its goal of turning the primary balance into a surplus by fiscal 2020.
Japan’s fiscal health is the worst among major industrialized economies, with public debt at more than 200 percent of nominal gross domestic product due mainly to swelling social security costs amid an aging society.
Kodama of Meiji Yasuda said the possibility of freezing the sales tax hike or implementing pump-priming measures is increasing, given weaker-than-expected economic conditions, but fiscal measures are unnecessary for the country whose unemployment rate is already low.
He argued that the problem lies in Japan’s low potential growth rate, which suggests the country’s growth capacity is expected to remain small for the medium- to long-term from the perspective of the supply side such as labor force and capital.
“Considering Japan’s current economic situations, there is no easy way” to solve the problems at once, Kodama said. “The only solution is promoting structural reforms such as deregulation, though they take time to produce effects.”