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May 2013 
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Japan’s Latest Stimulus Fix |
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Richard Summerfield, February 2013 |
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As the western world persists with stringent austerity measures, Japan, under new Prime Minister Shinzo Abe, is pursuing a different strategy entirely. Almost immediately after his election, Mr Abe fulfilled a key election pledge when he announced a ¥10.3 trillion ($116bn) stimulus package aimed at reviving the nation’s floundering economic fortunes. Mr Abe and his government hope that the stimulus package will increase the country’s gross domestic product (GDP) by 2 percent and create 600,000 new jobs.
In order to fund the stimulus, the cabinet office announced on 15 January an extra budget, including an issue of ¥7.8 trillion in bonds. ¥2.6 trillion of that bond issue is designed specifically to fill the gaps in Japan’s national pension scheme.
In mid-December the Japanese public voted Mr Abe and his conservative Liberal Democratic Party (LDP) back into office by a landslide. Following his disastrous stint in office in 2006-07, Mr Abe vowed to end 20 years of economic stagnation.
The LDP cantered to victory on this economic mandate, with Mr Abe declaring that his government would rebuild the county’s failing economy via a vigorous economic stimulus package. He also vowed to weaken the yen, called for “unlimited” monetary easing and stated that he would pursue a reflationary economic policy. During his campaign Mr Abe pledged support for both small businesses and large industries alike, promising to make Japan a “monozukuri”, or manufacturing nation, again.
Japan’s financial woes have been well documented and, on the eve of the election, the country fell into its fifth recession in 15 years. Furthermore, 2012 saw the country’s economy shrink 0.03 percent in Q2 and 0.9 percent in Q3. Government gross debt also spiralled to 237 percent of the country’s GDP according to projections released by the International Monetary Fund, the worst among industrial nations. “Unfortunately, the previous administration failed to work out how to boost growth and expand the economic pie,” Mr Abe said. “It is vital that we have an economic strategy that can create jobs and raise incomes to sustain growth.”
Further to the announced stimulus, the hawkish Mr Abe has increased pressure on the Bank of Japan (BoJ), pushing for governor Masaaki Shirakawa to set a 2 percent inflation target as a medium term goal. Mr Abe came to power vowing to pursue “unlimited” monetary easing. The new government is demanding that the bank does everything in its power to combat and defeat deflation. “The BoJ basically says it sees 1 percent inflation as a loose goal. That doesn’t show it’s responsible to achieve it and doesn’t show it’s strong determination,” said Mr Abe. “I told (Shirakawa) that I wanted an inflation target of 2 percent...and to forge a policy of accord with the BoJ to achieve this objective,” he added. The Abe administration has even threatened to challenge the independence of the bank unless it cooperates with the request.
Politically, the stimulus makes sense. The package, and its policy of monetary easing and enormous government spending, has proven popular with voters. According to a poll in mid-January, 66 percent of people approved of the plan and, with elections in the upper house scheduled for July, it is vital for the LDP that the Abe administration is seen to be tackling the stagnant Japanese economy head on.
Create jobs and stimulate growth
The new stimulus package is the 14th such programme the country has embarked upon since 1999 and will take the total the government has meted out in emergency funding in that time to over ¥75 trillion. Further to the initial funding announced by the government, the administration anticipates that the figure generated will rise to approximately $226bn when local and private sector funding is taken into account. Approximately half of all available funds will go into public works.
The reconstruction of the north-eastern coastal regions which were so devastated by the earthquake, tsunami and nuclear disasters of March 2011 will see approximately ¥3.8 trillion pledged by the government. The funds will be allocated to help rebuild the Tohoku region as well as to further strengthen disaster prevention precautions in the area. The government also intends to use the stimulus to fund much needed infrastructure redevelopments nationwide – the country’s aging road network, tunnels and ports are all in desperate need of repair. The pressing nature of this investment was emphasised on 2 December when a tunnel roof collapsed outside of Tokyo, killing nine people.
The administration also approved funding for a number of other diverse projects, including, improving security at nuclear facilities, traffic safety, updating aging military buildings, funding research into cutting edge technology and medicines, improving police equipment and facilities, and improving defences around contested islands in the East China Sea.
The stimulus package also includes ¥3.1 trillion which will be allocated for wealth creation. These funds are designed to aid and stimulate innovation in the renewable energy sector; the government hopes to promote private sector investment in these fields particularly. Equally, the funds will aim to promote the competitiveness of Japanese industry abroad. A further ¥3.1 trillion will go towards social security projects in healthcare, education and regional revitalisation.
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