Japan plans only a modest boost to government spending next year, a budget outline shows, as Prime Minister Shinzo Abe chooses not to follow the lead of US President-elect Donald Trump and other Western governments in shifting to fiscal stimulus. The Bank of Japan recently committed to keeping public borrowing costs near zero, giving a great deal of freedom to Abe to boost spending and get his reflationary goals back on track.
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Abe came to power in 2012 promising to revive the economy with a policy mix including fiscal stimulus, but it has remained stubbornly weak. Still, the prime minister is keeping a lid on spending, according to the budget document seen by Reuters, as he seeks to both bolster growth and rein in the developed world’s heaviest debt burden.
And with a weak yen and rising stock market helping Japan’s companies, he faces no discernible cries to crank up spending. “At this stage we don’t foresee large-scale fiscal mobilisation,” a government official involved in the process told Reuters.
This would put Japan out of step on policy with the United States, where Trump has promised an infrastructure boom and deep tax cuts, and Britain, where the government is ramping up borrowing to cushion the economic blow from its decision to leave the European Union. The situation is different in the world’s third-biggest economy.
“Additional fiscal expansion is not a necessity nor expected from the markets, with the weak yen and high Nikkei stock average following Trump’s election victory,” said Norihito Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley. “If Japan gives spending a further boost in line with Trump’s expected expansion, fiscal deterioration would be more of an issue in an economy with a debt-to-GDP ratio of 247 percent.”
Moody’s Investor’s Service said on Thursday that Japan’s “foremost credit challenge is bolstering debt sustainability, which hinges on underpinning GDP growth, while keeping inflation positive and maintaining stable funding rates.” Still, the company said its A1 rating and stable outlook on Japanese government debt “are supported by fundamental features that make its extraordinarily high level of government debt affordable.”
The BOJ has helped make that debt affordable by pushing interest rates to historic lows with aggressive monetary easing by flooding the financial system with cash. In September, the central bank essentially ceded the role of stimulator-in-chief to the government, shifting to a policy of “yield curve control” that vows to keep the interest rate on 10-year government bonds around zero, giving Abe essentially free money should he want to ramp up spending.
The budget document sets the stage to compile the budget for the fiscal year from April. It reiterates the government’s ambitious aim to boost annual economic output by 20 percent to 600 trillion yen ($5.29 trillion) by fiscal 2020.
But it also commits to “reaching our fiscal consolidation goal” of balancing the budget – except for debt service and new bond sales – by the same year. Abe’s top economic advisory panel is expected to approve the outline on Friday, which would pave the way for the government to draft next year’s budget next month to submit to parliament early next year.
Abe is aiming to rein in one of the fastest-growing parts of the budget: social-welfare spending for the fast-ageing population. The government plans to trim the growth in such outlays to 500 billion yen next fiscal year, down by 140 billion yen from the amount requested by the welfare ministry, according to people involved in the process.
The government would restrain this spending with a through review of medical expenses and by making the elderly pay more for nursing-care insurance.