Japan: Abenomics enters a new phase - ING

James Smith, Economist at ING, suggests that today’s fiscal announcements mark a new phase in the Abenomics programme ahead of this summer's Upper House election, as PM Abe seeks to provide support to an economy suffering from weak domestic and external demand.

Key Quotes

“PM Abe announced today that next year’s sales tax hike will be postponed until 2019 and that he will pursue “bold” economic expansion in the autumn. Although the former may have come as a partial surprise to markets, given that the official line up until now has been that it would take a Lehman-style crisis for it to be pushed back, many (ourselves included) had thought it was more likely than not that it would be postponed. Moreover, many had considered it to be highly probable that PM Abe would announce a fresh budget in advance of this summer’s election (which was confirmed to take place on 10 July, and that it would not coincide with a “snap” Lower House election).

Although the exact details of the budget remain unclear, the proposals seem to include funding for infrastructure projects (PM Abe cited the creation of a new railway). As we noted last week, the spending package is likely to come in at around ¥10 trillion, which is equivalent to 2% of nominal GDP and would roughly match the size of the extra budget implemented at the start of PM Abe’s tenure in 2013.

What is fairly clear is that this budget will have to be (at least partly) funded by increased debt issuance. PM Abe said that the zero interest rate environment must be utilised to the “utmost possible”. Interestingly, as the global debate on “helicopter money” rages on, the combination of QQE and bold fiscal expansion is not a million miles away from this idea (the additional issuance can easily be absorbed into the BoJ’s existing JGB purchase programme).

Of course, the main difference is that, if carried out persistently, such a policy would pose fiscal sustainability questions. Indeed, this is an area where PM Abe was keen to emphasise that he remains serious about fiscal consolidation. This probably means that a commitment to pursuing bold fiscal stimulus in subsequent years, as some within the ruling LDP party had proposed, is unlikely.

Overall, the stand-out comment was that Abenomics will be sped up over the next 2.5 years. With around ¥9.6 trillion worth of infrastructure investment to be implemented by September (from the existing budget) and now an extra budget to bridge the gap thereafter, Abenomics has arguably entered a new phase as policymakers seek to boost growth against a backdrop of weak external and domestic demand.

The question now is whether the Bank of Japan will follow. We think the answer is probably “yes” and expect additional stimulus to be announced in July. However, we remain sceptical about the prospect of a further near-term rate cut, as the BoJ will want to be convinced that it won’t do more harm than good (as was the case in January). Thus, we currently expect any additional stimulus to come from credit easing via corporate bond/ETF purchases.”