January 13, 2013 4:24 pm

Tokyo’s stimulus

Abe’s fiscal boost is welcome, but is no game-changer

Shinzo Abe has great expectations for his stimulus package. Japan’s new prime minister thinks his Y10.3tn ($116bn) fiscal boost will provide a “rocket-start” to the economy, leading to fast economic growth and rapid job creation. So far, investors appear to agree with him: when the plan was unveiled last Friday, the Nikkei index rose by 1.4 per cent.

Yet, such optimism is probably excessive. A Japanese government seeking to revive its ailing economy via a combination of public works and subsidies is hardly big news. There have been 14 stimulus packages since November 1999 and none of them has put the economy back on its feet. Nor was last week’s fiscal expansion too large. Mr Abe seems to be running to stand still, rather than sprinting for growth.

That said, the government is right to open its purse. The public sector is not excessively swollen: at about 40 per cent of national income, spending by the public sector in Japan is below the European average. Borrowing costs are low and, thanks to a domestically held and largely captive bond market, unlikely to increase in the near term. While the public deficit and debt should be cut, this should happen when the economy returns to sustained growth.

It also matters what Mr Abe has chosen to spend money on. About Y3.8tn will be used to rebuild the Tohoku region, devastated by the 2011 tsunami. This is fair and should deliver high rates of return. But the economy cannot rely on construction alone. The Y3.1tn earmarked for industrial competitiveness should be used for what it says, and not to prop up slow-growing sectors.

Nor is fiscal stimulus enough. Japan also needs a more aggressive monetary policy. Lifting the inflation target for the Bank of Japan to 2 per cent, as Mr Abe wants to do, is sensible. But once the new target is in place, it cannot remain a pious aspiration. The BoJ should take the bold steps needed to achieve it. These include more creative forms of quantitative easing, for example buying more long-term domestic bonds.

But Mr Abe should be under no illusion: to secure long-term growth, Japan needs structural reforms. Since the labour force is shrinking, more imaginative policies on immigration and to keep more women in the workforce are needed. The service sector has to be deregulated to increase its productivity. Last week’s fiscal stimulus, while welcome, was the easy part. It is now time for Mr Abe to be more ambitious.

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