July 26, 11:30 JST, 2016

There is no 10 trillion yen stimulus

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There was a leak story in the Nikkei today (July 26) on the economic stimulus plan to be unveiled in early August. It is the stimulus Prime Minister Abe spoke of in the immediate aftermath of the Upper House election on July 10. The stimulus was supposed to exceed 10 trillion yen, 2% of Japan’s GDP. You can read more details in the Nikkei, but according to the article, the stimulus to be included in the FY2016 supplementary budget will now be around 2 trillion yen, the bulk of which will be spent on old fashioned public works. The economic effect of the stimulus, defined as a “net increase in fiscal spending”, will be even smaller. Some part of the supplementary budget will be financed through savings from the main budget, in effect reallocating spending already budgeted in the 2016 main budget. The headline of the Nikkei article talks about “doubling to 6 trillion yen”, but it is rather misleading. If you read the article, you will quickly realize that the 6 trillion is the amount that will be spent over the next few years, and it includes the amount that would have been in the main budget for 2017 regardless. So, there you are. There is no 10 trillion yen fiscal stimulus. We would assess the net economic effects from the stimulus to the quite limited, perhaps 0.2% to GDP. 

Where does it leave the BoJ? There are two ways to think about it. If one believes that a coordinated fiscal and monetary expansion is an essential ingredient to reflate Japan, the BoJ’s additional monetary easing will have limited effects now that there is virtually no fiscal stimulus. On the other hand, one could argue that the BoJ should do more in the absence of a fiscal stimulus. If the BoJ leans towards the latter argument, the BoJ may feel obliged to ease drastically this Friday. Which course will the BoJ choose?

In our view, the BoJ is probably leaning toward the former. The Abenomics had a good start in 2013 as there was a combined fiscal and monetary expansion. The public work rose by 8% in 2013. 

The second arrow, a fiscal stimulus, was abandoned after 2014

However, the growth turned south as soon as the fiscal stimulus stopped in 2014. The private sector demand such as private consumption and capital expenditure that were supposed to take over the baton never did. 

Private demand did not pick up the baton in 2014-15

As we wrote in two recent reports, This Gentleman prefer surprises and Time for Damage Control, we think the BoJ has nearly exhausted its tools for monetary stimulus and while there are measures they could still employ, they probably prefer to save them for later stormy days. We do not think the BoJ will decide to implement any drastic easing this Friday.