Japan’s Fiscal Stimulus Won’t Work

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Japan’s New Stimulus Is Just the Same Old Thing

日銀のETF購入戦略から見る、名目GDP600兆円への道筋

What’s Wrong With Japan’s Economy?

 

First to be clear, the BOJ has basically very little room to maneuver, although we know it has to. [1]

However, the worse part is, a “new” but moderately sized and mediocre fiscal stimulus package is never going to work

 

Reason 1. It’s nothing new

Abe unveiled the outlines of a package worth 28.1 trillion yen in total, but

– less than half of this is new, and only 4.6 trillion is planned to fall in the current fiscal year. [2]

– Roughly half of the immediate stimulus will take the form of higher welfare spending, with outlays on new and repaired infrastructure making up most of the rest [3]

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– Neither infra investment nor welfare spending looks like convincible

More importantly,
1x-111Japan’s governments have made a habit of over-promising and under-delivering when it comes to budget planning!

– the actual stimulus is always far smaller than the plan’s headline figure

– Japan’s stimulus bills are a more-or-less constant flow of deficit spending
(not the temporary, recession-fighting measures typically employed in the U.S. and advocated by most Keynesian economists)

 

Reason 2. The economy is already at full employment

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Studies of fiscal multipliers typically agree that return is much lower when unemployment is low. [4]
And there are simply very few Japanese people left to put to work.

Also, fiscal sustainability will be actually undermined

– Japan’s deficit was just moving to be barely sustainable in the long term, thanks to the government’s sales-tax hike, zero interest rates and healthier corporate profits

– the new spending would raise talk of more consumption-tax hikes to plug the hole without a clearer support from BOJ

 

Tough but true Remedy

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The fully employment can be better

[5]

Instead of continual fiscal stimulus, government should focus on worker efficiency.

– Japan’s labor productivity has been essentially flat for a decade.

– Monetary and fiscal stimulus have put everyone in Japan into jobs, but they aren’t doing the kind of work that takes full advantage of their skills.

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“Productivity-focused reforms — improving corporate governance, liberalizing labor markets and opening up protected domestic markets — are the best move, even though they will take years to have an effect.”

 

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