August 2, 2016, 21:00 JST

There is no 28 trillion-yen stimulus

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As most of our readers must have realized by now, the 28 trillion-yen stimulus was an inflated statement. The actual fiscal spending will be at most 7.5 trillion-yen across the fiscal year (FY) 2016-2017. The government is also using 7.5 trillion yen as the base for calculation when it estimates that the stimulus would boost Japan’s GDP by 1.3%.  

Explaining the gap between 28 trillion-yen and 7.5 trillion-yen

The headline figure, 28 trillion-yen, is the sum of the sizes of all projects included in the stimulus package, both public and private. For example, it includes the total size of debt guarantees the government provides to help SMEs secure credits from private sources. When we limit the scope to the sizes of direct spending or loans provided by the government, the figure shrinks to 13.5 trillion-yen.

The 13.5 trillion-yen is still not yet appropriate as a measure for the economic impact of the stimulus. It includes the size of public loans. Loans provided by public sector financial institutions may be advantageous for borrowers, but borrowers could have financed the same sum from private sector sources without public assistance. When we limit the scope to fiscal spending by the government, the size of the stimulus shrinks to 7.5 trillion-yen. 

In our view, this 7.5 trillion yen could still be an overestimation. Out of 7.5 trillion-yen, 2.5 trillion-yen are scheduled for the FY2017. But is this 2.5 trillion-yen an actual net increase? Would not the same sum have been spent in the normal FY2017 budget?   

The economic effect of the stimulus will be short-lived 

Whatever the actual size of the stimulus is, it is logical to think that the effect of the stimulus will be short-lived. The Japanese government is still maintaining its pledge to balance its budget by 2020. The government was running a deficit of 15.9 trillion yen in FY2016 before this stimulus package was formulated. Once the 5 trillion-yen spending from the stimulus package is added, the Japanese government will be running a deficit of 20.9 trillion in FY2016. If the government is to keep its pledge to balance the budget by 2020, it needs to either cut its spending or increase its tax by 20.9 trillion yen in the following four years till 2020. Whatever the increases in spending in 2016, the government has to cut them right back. In our view, the “28 trillion-yen stimulus” is another misfired arrow, along with other growth enhancing reforms that never materialized.