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Japan's Cabinet approved on 13 December a supplementary budget
worth JPY3.2 trillion (USD29.2 billion) for fiscal year 2019,
following the Abe administration's announcement on 4 December of
JPY13.2 trillion in fiscal spending (totaling JPY26.0 trillion,
including private-sector and other outlays). These stimulus
measures are likely to mitigate downside risks to the economy and
facilitate the ruling coalition passing legislation in 2020.
The initial stimulus package plans to use funds deducted from
existing budgets, but the December supplementary budget will
require a JPY2.2-trillion (USD20.0 billion) issuance of
construction bonds. These will go towards rehabilitation works
after Hagibis, the largest typhoon since 1958, hit Japan's Kantō
region in October 2019. This coincided with the third delay to
increasing Japan's consumption tax from 8 to 10%, which compounded
the negative effect on retail sales, production, and other business
activities in October. Notably, industrial production fell by 4.5%
month on month (m/m) in October. However, IHS Markit assesses that
the damage done by the typhoon is likely to lead to replacement
demand and construction work in 2020 and beyond. In addition, the
government will issue JPY2.3 trillion in special bonds because of
lower tax revenues than projected in fiscal year (FY) 2019.The
stimulus plans are larger than IHS Markit previously expected
because of the damage caused by the typhoon.
The larger-than-expected fiscal stimulus measures are likely to
lift Japan's real GDP growth until the end of FY 2021.
Specifically, the stimulus measures include JPY5.8-trillion worth
of planned rehabilitation works and disaster-prevention projects
and JPY4.3-trillion worth of measures to strengthen economic
activities after the 2020 Tokyo Olympics. In addition,
JPY3.1-trillion worth of packages for supporting for small and
medium-sized enterprises, prospective export-oriented businesses,
and local communities through adopting innovative technologies will
be included.
The large-scale stimulus indicates that the Abe administration
is concerned about repercussions on Japan's economy of the trade
disputes between China, the European Union, and the United States.
Exports have continued to decline because of lower external demand:
the China-US trade dispute is reducing exports to those two major
trade partners. In October, Japanese exports to China and the US
were down 10.3% year on year (y/y) and 11.4% y/y, respectively.
Weak exports have reduced industrial production and corporate
profits in the manufacturing sector, according to third-quarter
2019 corporations' statistics released by Japan's Ministry of
Finance. The coincident indicator of business activity released by
the Cabinet Office has been declining through October to 94.8,
making further contraction likely.
The Abe administration expects the stimulus plans to boost real
GDP by approximately 1.4 percentage points, but IHS Markit assesses
this to be optimistic. Large top-down stimulus plans are often
eroded by wasteful spending and delays to progress. Specifically,
in Japan, public works often face difficulties advancing as planned
because of shortages of construction workers and higher costs. IHS
Markit estimates that the stimulus package's contribution to
Japan's real GDP is likely to be 0.32 percentage point in 2020,
0.16 percentage point in 2021, and 0.24 percentage point in 2022
before the level of government spending (especially on public
works) begins to decline. We have revised our real GDP growth
forecasts to 0.6% in 2020, 0.7% in 2021, and 0.4% in 2022.
Importantly, a weak economy and larger fiscal expenses are
likely to slow fiscal consolidation, indicating that the government
is unlikely to meet its target of eliminating the primary balance
by FY 2025. Some of the stimulus measures will go to pool budgets
for multi-year plans, most likely being spent in FY 2020 and
2021.
Prime Minister Shinzō Abe and his ruling Liberal Democratic
Party-Komei Party coalition remain strong after securing a majority
of seats in the July 2019 Upper House election. This not only
contributes to economic policies, but also indicates that a bill on
constitutional revision is more likely to be tabled.
Pro-revisionist members hold a super-majority in the Lower House,
meaning a proposal to amend the constitution would probably pass
through the Diet. Nonetheless, the subsequent referendum is less
likely to be successful, especially since Abe and his wife's
reputation has been mired by alleged scandals involving altered
documents pertaining to the discounted sale of state land to an
ultranationalist private-school operator and involving a permit for
a veterinary school owned by an associate of Abe's - Abe has
repeatedly denied his or his wife's involvement. IHS Markit
assesses that an amendment would only likely be approved by voters
if it focused on popular measures such as enshrining environmental
protection and universal education in the constitution. The Abe
administration could attempt to pass these changes first, so that
the post-Second World War constitution has been altered already.
This would likely occur before attempting at a later date to revise
Article 9, which renounces the right to maintain air, land, or sea
forces and the right to conflict as a means for resolving
international disputes.
Indicators of changing risk environment
Increasing risk
If further downside risks arise, the Abe administration is
likely to introduce additional stimulus measures.
If the Trump administration in the US decides to increase
tariffs on Japanese automobiles and auto parts, despite the
US-Japan Trade Agreement signed in September 2019, it would
negatively affect this sector and undermine Abe's image as strong
leader on the world stage.
Decreasing risk
If the Japanese government can tighten fiscal consolidation, it
will be more likely to attain its target of eliminating the primary
balance deficit by FY 2025.
If the administration is able to resolve the ongoing dispute
with South Korea over compensation for victims of forced labor
during the colonial period (1910-45), the outlook for firms and
sectors affected is likely to improve, specifically manufacturing
firms such as Nippon Steel & Sumitomo Metal and the tourism
sector.
Posted 06 January 2020 by Harumi Taguchi, M.A., Principal Economist – Japan and Pacific Islands, Economics and Country Risk, IHS Markit