Sometimes government stimulus jolts are a comfort, a sign the policymakers are safeguarding growth. Other times, they validate doomsayers’ worst fears about the economic outlook.
Tokyo’s new US$121 billion spending plan is very much the latter – and a warning shot for the rest of Asia heading into 2020.
Prime Minister Shinzo Abe’s team is spinning like mad, trying to project blame elsewhere – the trade war, China’s slowdown, natural disasters, you name it. In truth, Japan’s need for yet more pump-priming proves how little progress Abe made since 2012 in remaking Asia’s second-biggest economy.
And it hints at something darker: that the year ahead could be even more chaotic.
Post Olympics slump?
The first thing to know about Tokyo’s new package is that it won’t be the last.
Japan is limping out of 2019. It ground to a near halt in the July-September quarter. Retail sales plummeted at their fastest pace in more than four-and-a-half years. Exports fell 9.2% year-on-year in October, fueling recession talk.
What’s telling, though, is that Team Abe is already making noises about a post-2020 Tokyo Olympics slump.
The Games, running from July 24 to Aug. 9, have been sold as a big win for Japanese growth. The construction of stadiums, hotels and other related facilities, coupled with spending by an expected 600,000 foreign visitors, was a key pillar of “Abenomics.”
In 2012, Abe sold his revival program by employing an old samurai metaphor. It held that three separate arrows fired at a target might have an impact. When fired simultaneously, they’re sure to do real damage. The first arrow was fired by the Bank of Japan, which has since pumped untold trillions of dollars into the economy. The Olympics was arrow No. 2. The third – bold structural reforms – never really left the quiver.
The breakdown of Abe’s latest stimulus plan is an admission that arrows No. 1 and No. 2 didn’t do as much as hoped. They helped produce the longest expansion since the 1980s, but wages have not surged as planned. That cost Abe a virtuous cycle to generate a self-reinforcing revival. And it leaves Japan all-too vulnerable to US President Donald Trump’s trade war.
What can the BOJ do?
The new package earmarks spending on public-works projects, increased defenses against extreme weather and tablets and other devices for schoolkids. The most important feature, though, is its true size. When you add in credit guarantees, government loans and other private-sector initiatives, the plan swells to more than US$239 billion.
Equally telling is renewed pressure on the Bank of Japan to add even more stimulus. It’s more whisper campaign than table-pounding, but the signals are unmistakable. On November 6, for example, Finance Minister Taro Aso downplayed concerns the BOJ’s negative-rate policies were hurting the banking system. To traders, that was code for “more room for rates to drop.”
The BOJ’s options are plenty limited. It already owns more than half of all outstanding government debt and some US$266 billion of stocks via exchange-traded funds. Yet its inaction over the last 12 months stands in stark contrast with easing moves by the Federal Reserve and European Central Bank. The BOJ could lift business confidence by adding more liquidity or even just re-calibrating asset purchases.
Forever trade war
The all-hands-on-deck vibe in Tokyo should give officials from Seoul to Jakarta pause for thought. As global growth wanes, policymakers must worry about where the US-China trade war heads next year. This week, Trump hinted that a much-hyped deal could now be delayed until after the November 2020 election. The Dow Jones Industrial Average fell 400 points in response, a sign markets have much riding on a pact.
Trump, as political wags like former Barack Obama advisor David Axelrod claim, relishes the fight more than scoring a “phase one” or “phase two” deal. The US leader may be signaling that trade-war weary markets haven’t seen anything yet. That could mean new China tariffs, a move to weaken the dollar, more bans on mainland tech companies – or all of these steps and more.
With Trump turning his sights to France, Brazil and elsewhere, 2020 could be a wild one. That goes, too, for Japan, where the parliament on Dec. 4 approved a trade deal with the US. It cuts or eliminates taxes on some $7.2 billion of US agricultural goods, including reducing a 38.5% duty on American beef to 9%.
The 2.5% tax on Japanese auto imports, though, remains in place. The real worry is that Trump makes good on 25% levies on all imports of cars and auto parts. As Trump pressures Abe for “phase two” talks, that risk will undermine confidence in corporate Japan circles.
Such uncertainty may make Japan Inc. even less inclined to fatten paychecks in the year ahead. So might the low odds this latest stimulus gambit will do the trick. The sequencing, for example, is rather unambitious – rolling cash out through fiscal 2021. The hope is to nudge gross domestic product up by 1.4%.
Yet economists including Ryutaro Kono of BNP Paribas think a boost of closer to 0.3-0.4 percentage points is more likely. Considering Japan grew just 0.2% in the third quarter, that isn’t much of a cushion against negative growth.
Need for new stimuli
Team Tokyo needs to raise its ambitions. Abe’s team should unleash arrow No. 3. A supply-side shock that reduces bureaucracy, loosens labor markets and catalyzes a startup boom might give Japan Inc. greater confidence to hike wages and investment in new growth industries.
Seven years in, though, Abe’s government has relied almost exclusively on old-school stimulus.
Expect more in the year ahead. In presenting the package to lawmakers, Abe highlighted the need to “overcome downside risks” and “maintain or enhance economic viability” after the Olympics. It’s very different language from the Olympics-will-boost-the-
Tokyo must tread carefully, of course, given its already daunting debt load. It’s currently two-and-a-half times annual GDP – the largest burden in the developed world. In October, Tokyo hiked sales taxes to 10% from 8% to help pay down some of that debt – only to disincentivize household spending.
The paradox here is that protecting growth will require more aggressive government efforts, including at least some increased borrowing. Recession may be on the cards regardless, as companies and consumers realize even bigger trade clashes could be afoot in 2020.
If that proves to be the case, Japan’s stimulus drama will go global in a hurry.