May 27, 2020

JAPAN: A second historic stimulus package alone will not cure what ails Abe

BY Tobias Harris

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( 6 mins)
  • The Abe cabinet approved a second round of stimulus on Wednesday, 27 May that equals last month’s historically large JPY 117.1tn (USD 1tn) price tag.
  • The largest portion of the stimulus package is intended to provide interest-free financing for businesses and its ultimate economic impact is difficult to anticipate.
  • It is therefore unlikely that the second stimulus package will shift public opinion on Prime Minister Shinzo Abe’s leadership – and the use of deficit spending could set the stage for major political battles after he leaves office.

This larger-than-expected stimulus package is likely a product of Abe’s political struggles – and may therefore be even more subject to discrepancies between the announced headline figure and the amount of money that is actually distributed than is usually the case with Japanese government stimulus packages. Abe not only must convince the public that his government is effectively addressing the economic distress caused by the pandemic but also needs to quiet dissension within the ruling coalition. Whether the new stimulus package helps him politically will depend in part on how effectively it is implemented: Abe has been criticized for delays in the distribution of cash payments to individuals included in the first supplemental budget. However, the stimulus package alone is unlikely to restore lost trust.

Breaking down the stimulus package

The core (“fresh water,” in Japanese parlance) of the stimulus package – the outlays included in the second FY2020 supplemental budget – will total JPY 31.9tn (USD 296.2bn), the largest-ever supplemental budget. This spending will be boosted by JPY 1.1tn (USD 10.2bn) from government special accounts and JPY 200bn (USD 1.9bn) from emergency reserve funds. A significant portion of the supplemental budget – JPY 10tn (USD 92.9bn) – will go entirely to replenishing the government’s Covid-19 countermeasures reserve fund, affording it some flexibility in the provision of financial assistance. The single largest item is a JPY 11.6tn (USD 107.7bn) outlay to provide capital for a fund that will provide interest-free and unsecured loans to backstop companies, part of the broader pursuit of financial stability that was the focus of the Abe government’s pact with the Bank of Japan (BOJ). Other pieces of the supplemental budget will provide JPY 2tn (USD 18.6bn) in emergency subsidies to localities; JPY 2.2tn (USD 20.4bn) to provide up to JPY 60mn (USD 557,220) in rent assistance for qualified businesses for up to half a year; and roughly JPY 3tn (USD 27.9bn) to shore up the medical system, including funding for vaccine development and bonuses for healthcare workers. The budget will also hike the “employment protection” subsidy for businesses retaining workers and provide income support for single parents and low-income university students.

The second supplemental budget is accompanied by a second supplemental plan for the Fiscal Investment and Loan Program (FILP), which will provide for JPY 39.4tn (USD 365.9bn) in loans and credit guarantees for businesses. The bulk of this lending will go to small businesses, although JPY 15tn (USD 139.3bn) is additional funding for an emergency financing vehicle accessible for larger businesses. The final component of the total figure touted by the Abe administration – more than JPY 40tn (USD 371.5bn) – is the least tangible, as it represents simply the government’s estimate for private lending that will supplement the official lending included in the supplemental budget and FILP plans.

JAPAN: A second historic stimulus package alone will not cure what ails Abe 1

Questionable political value

It is unlikely that voters who rated the first stimulus package poorly and have been critical of Abe’s crisis management will be swayed by a stimulus package whose large headline number is the product of financial prestidigitation and the bulk of which constitutes of business lending, however important these programs could be for averting bankruptcies among small businesses and a spike in unemployment. Moreover, opposition lawmakers will likely question the JPY 10tn reserve funds, warning of the potential for abuse without Diet oversight.

The opposition will not, however, have much time to raise these concerns. The supplemental budget will not be submitted until 8 June, ahead of the end of the parliamentary session on 17 June. Abe is gambling that, whatever objections they have, opposition parties will want to avoid appearing obstructionist and will therefore not impede swift ratification or otherwise force Abe to extend the session, which Abe wants to avoid as it would give opposition lawmakers more time to question him about the resignation of Tokyo public prosecutor Hirofumi Kurokawa.

The stimulus package is not Abe’s last chance to reverse his sagging fortunes. If Japan can avoid another significant outbreak in the coming months and if plans to reopen the economy go smoothly – aided by the two stimulus packages – Abe’s support could stabilize. He also has another tool at his disposal, a cabinet reshuffle, which he will likely carry out sometime before September. The precise timing could depend on polling. Either way, Abe will be under considerable pressure to pick a “cabinet of notables” capable of competent crisis management that also sets the stage for the post-Abe race.

Japan’s fiscal future

As with the first supplemental budget, this spending will be backed entirely by newly issued government bonds, raising the total value of the government’s FY2020 debt issuance to JPY 90.2tn (USD 837.7bn). This gross debt issuance, which is around 20% of Japan’s GDP, virtually guarantees that as the economy recovers, the next prime minister will likely face a heated debate over the long-term fiscal outlook. The Ministry of Finance (MOF) and its fiscal hawk allies in the LDP have been sidelined as the stimulus packages have been rolled out, but they will likely find their voice during the post-Abe succession campaign and in the early days of the next premiership. However, the fiscal hawks will likely be opposed by proponents of Abe’s “growth before fiscal consolidation” approach or the increasingly vocal advocates for unconventional approaches, whether outright debt monetization, modern monetary theory, or other alternatives to MOF’s fiscal orthodoxy, suggesting that the bitter fights over fiscal policy that split the LDP during the 2000s could be due to return.

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