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Stimulating debate

28 July 2016 By Quentin Webb

Shinzo Abe’s big spending spree is deliberately puffed up. The Japanese prime minister said on July 27 his government is planning a 28 trillion yen ($265 billion) stimulus package to revitalize his flagging “Abenomics” project. The headline tally is more than 5 percent of the country’s annual output, and exceeds the 20 trillion yen blitz that accompanied the start of Abe’s revamp in 2013. But the most crucial part will be considerably smaller.

Governments everywhere are prone to inflating their promises. Japanese economists are well versed in drilling down for the “real water” – the extra central or local government spending that produces a direct economic uplift. In this case, the substance is in the 13 trillion yen of “fiscal measures” promised by Abe.

Even then, Goldman Sachs reckons more than half of that amount will actually be in the form of cheap loans via the “Fiscal Investment and Loan Program” (FILP) – a system that funds infrastructure and other worthy schemes via bonds that are repaid from the projects’ cash flows.

That leaves 6 trillion yen of actual new spending for earthquake reconstruction, cheaper job insurance, higher childcare wages, and so on. Perhaps just 3 trillion yen of that will be dished out this year, the bank’s team says.

What of the remaining 15 trillion yen promised by Abe? This probably includes things like dollar loans from state-backed lenders, and spending by private companies supported by government subsidies. These are unlikely to make a big difference, especially as Japan is already awash with super-cheap funding.

Abe has good reasons to engage in hyperbole. For a start, Japan’s already-high government debt means fiscal abandon is not really an option. Eye-catching totals might help boost consumer confidence – itself useful in battling entrenched expectations of stagnation and deflation. Shoring up political support could also allow Abe to call a quick lower-house election later this year.

Moreover, Abe’s promises could prod the Bank of Japan into action. It has held steady since shocking the market with negative interest rates in January. Expanding its already-massive bond-buying programme might look slightly less desperate if the government is joining in the heavy lifting. And FILP bonds could provide a new source of supply for a central bank that could soon run short of government debt to buy.

 

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