Japón Fiscal November 2023

Japón: Kishida unveils stimulus worth around 3% of GDP in November

– Inflationary pressure on households inspired the stimulus.

– The package should bring down short-term inflation and moderately support private spending.

– The plan will increase pressure on the fiscal balance.

On 2 November, Prime Minister Fumio Kishida unveiled stimulus measures totaling about JPY 17 trillion (around 3% of GDP) in a bid to protect households from persistent inflation; Kishida’s approval ratings have flagged in recent months, putting at risk his bid for reelection at the next polls in 2025.

The stimulus is smaller than the two supplementary budgets created in 2021 and 2022 (which were worth JPY 31.6 trillion and JPY 29.1 trillion, respectively) but is significantly larger than those that came before the pandemic.

At a cost of roughly JPY 5 trillion, the government will temporarily cut income and residential taxes and give handouts to low-earning households, boosting private spending ahead. These cuts could come into effect in June 2024. The government will also extend subsidies on gasoline, electricity and gas until the end of April 2024, as well as give support to businesses to raise wages.

JPY 13 trillion of the spending will be funded by a supplementary budget for the remainder of the fiscal year, which ends in March.

After decades of fighting deflation—a vicious cycle wherein low price pressures depress private spending, and vice versa—inflation over the last year has spiked to levels not seen since the 1980s as a result of high commodity prices and a slumping yen. This has put a strain on household finances and, as a result, Kishida’s popularity. The goal of the package, therefore, will be to even out inflation—reducing it in the short run but aiming to increase it in the long run to around the Bank of Japan’s 2.0% target by encouraging businesses to raise wages.

However, it remains to be seen if the handouts and tax cuts will substantially boost private spending; given that the measures are only temporary, households may save a large proportion of the windfall in order to smooth out their consumption. Our panelists currently expect muted GDP growth in 2024 and for inflation to fall back below the Bank’s 2.0% target in late 2024 as temporary cost-push factors recede.

In addition, the package is likely to add to Japan’s substantial public debt burden, which is the highest in the world as a percentage of GDP. The package is unlikely to threaten fiscal sustainability given how low interest rates are, but with the BOJ slowly tightening monetary policy, the costs of servicing this debt are now likely to rise, weighing on the fiscal balance. Our panelists expect the general government fiscal balance to narrow from -6.2% of GDP in 2021—the latest year with available data—to -3.0% of GDP in 2026, before plateauing through to the end of our forecast horizon in 2028. After decreasing this year, public debt is also projected to remain elevated at around 250% of GDP through to the end of our forecast horizon.

Analysts at the EIU commented:

“Helping companies to create more jobs and afford higher wages in the coming years will ensure that Japan avoids deflation and lay a foundation for consumption-led growth. In this regard, the government is allocating funds to promote investment in key industries seen as growth areas in line with global trends and Japan’s economic security objectives. Beneficiaries will include companies in the batteries and semiconductor industry, as well as space-related technological development.”

Goldman Sachs’ Yuriko Tanaka said:

“We expect private consumption in 2024 to be around 0.5 pp higher than without these benefits [of handouts and tax cuts], which converts to a 0.3 pp addition to GDP.”