Japan’s latest stimulus fix

February 2013  |  FEATURE  |  BANKING & FINANCE

Financier Worldwide Magazine

February 2013 Issue

February 2013 Issue

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.

Weakening the yen is another priority of the Abe administration. It is exerting a great deal of pressure on the BoJ to pursue a policy of aggressive monetary easing in order to weaken the yen and provide much needed help to the country’s industrial sectors, notably its struggling car and electronics companies. The Japanese economy is heavily dependent on exports; as such, the strength of the yen against the euro and the dollar has massively hindered the country’s economic growth, plunging it into numerous recessions in recent years. Japanese companies have stagnated as exports of goods to their key markets, including the US, Europe and China, have rapidly declined. Although there are economic forces at work in the US and Europe which will have affected sales to those regions, territorial disputes between China and Japan have also negatively affected sales. The continued economic malaise in the West will surely force the Abe administration to improve relations with China in order to aid the country’s exporters. As Japanese sales have dwindled, sales of cheaper South Korean goods to those same major markets have risen exponentially in recent years. Importantly, the yen has weakened significantly since November 2012 in anticipation of the Abe administration’s financial stimulus, though clearly there is still more work to be done.

Stimulus addiction

Despite the obvious benefits provided by the stimulus package there remain a number of critics who do not feel that the new government is doing enough to tackle the longstanding problems lurking within the economy. While the scale of the stimulus may provide a short term boost to the markets and help provide short term growth, further measures are required to provide and sustain economic growth in the long term. “So far what we have seen is measures to kick-start the economy, but once the stimulus boost is over, the coffers will be empty again and Japan will have no more money to spend,” stressed Martin Schulz of the Fujistu Research Institute.

Japan’s reliance on – or addiction to – large-scale economic stimulus packages is also a concern. The economy has developed a dependence on government intervention over the last 20 years, and while initially this latest stimulus found favour with the markets – the yen dropped 12 percent in the immediate aftermath of the announcement, trading at around 89 cents to the dollar, and the Nikkei 225 closed at 10,802, representative of a two year high – whether this recovery can be maintained is yet to be seen. Should the initial response to the stimulus fail to trigger genuine, sustainable growth, the temptation to provide additional funding may prove difficult to withstand, plunging the nation into another vicious cycle of requiring more stimulus.

Mr Abe’s administration has also come under fire for the types of infrastructure projects which will benefit from the stimulus package. If the money is allocated to projects which can generate high returns then the package can achieve great success; however, there is a feeling among analysts that the sheer scale of the package will lead to a large amount of money being wasted on projects with little to no economic merit. These projects will add to the public debt issue, raising the astronomically high debt to GDP ratio even higher, without substantially boosting output. With the government’s gross debt already perilously high, it is difficult to see the wisdom in potentially adding to the pile without encouraging sustainable, long term growth. 

Critics of the latest stimulus have accused the LDP of repeating past mistakes in which they smothered the country with concrete, saddling Japan with the biggest public debt in the world in the process. Infrastructure redevelopment programmes and public works projects are considered to be a staple of LDP governments – in the post war years the party embarked on a number of high profile public works projects. “There is a suspicion that it is a kind of wasteful spending on white elephant projects that the LDP did in the past. That’s wrong,” argued Mr Abe. Moreover, since announcing the package, Mr Abe has faced accusations of ‘pork barrel politics’, something he has vehemently denied.

While there has been a great deal of scepticism surrounding the stimulus package and the feasibility of the scheme, one of the biggest criticisms the government has encountered is the notion that, in order to facilitate long term economic growth, fundamental reform of the country’s bureaucracy – including its political and educational systems – is desperately needed.

It has been suggested that Japan has many problems to address before more cash is pumped into the system. The country is saddled with an aging population – Japan is the only country globally where 30 percent of the population is over 60 – a diminishing workforce and a large number of workers trapped in struggling, obsolete manufacturing industries. The country is also over-run with debt-ridden ‘zombie’ companies which are sustained by government credit intervention. 

How successful Mr Abe’s stimulus package is when it comes to revitalising the Japanese economy may depend on the prime minister’s ability to follow it up with the long sought after reforms the country needs. Though some of the measures ultimately may not be popular with the LDP’s longstanding rural supporters, removing expensive agricultural subsidies, allowing zombie companies to declare insolvency, and increasing immigration and foreign investment in order to compliment the nation’s shrinking working population, are all crucial to the future success of the Japanese economy. It is also essential for the revival of Japan’s moribund export industry that the Abe administration repairs the country’s estranged relationship with China.

© Financier Worldwide


Richard Summerfield

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