30 Mar 2016
JPY: Fiscal policy at a turning point? – NAB
Research Team at NAB, notes that in January, the Japanese parliament passed a ¥3.5 trillion supplementary budget for fy2015, and the initial Budget for fy2016 was passed this week.
Key Quotes
“However, this does not mean that Japan’s fiscal policy has turned expansionary; higher tax revenues are a major source of finance for the extra expenditure and supplementary budgets are a regular event (one of a similar size was passed the previous year).
Indeed, the budget deficit is set to fall again in calendar 2016, suggesting fiscal policy remains a headwind, although by no more than in recent years.
That said, if the economy were to weaken, fiscal policy could become more stimulatory. Indeed, recent press reports suggest that the Government is considering fiscal stimulus measures. Some press reports have indicated that this could include a delay to the scheduled April 2017 increase in the Value Added Tax (VAT) although the Prime Minister has stated that it will go ahead unless there a major shock (such as another GFC). The reports indicate that a decision is likely to be made ahead of the G7 summit, being hosted by Japan, in late May 2016.
Against this, the Government has a target of achieving a primary surplus by FY2020. But not even the most optimistic projections suggest that the target will be achieved on current policy settings. History suggests that in the event of a downturn, the target will be sacrificed (or delayed) and stimulus measures introduced, so additional measures would not be a surprise given the lack of momentum in the economy.
While the budget deficit is falling, it remains higher than growth in nominal GDP. As a result Japan’s government debt to GDP ratio, which is already high by international standards (particularly on a gross debt basis), is likely to continue rising.”
Key Quotes
“However, this does not mean that Japan’s fiscal policy has turned expansionary; higher tax revenues are a major source of finance for the extra expenditure and supplementary budgets are a regular event (one of a similar size was passed the previous year).
Indeed, the budget deficit is set to fall again in calendar 2016, suggesting fiscal policy remains a headwind, although by no more than in recent years.
That said, if the economy were to weaken, fiscal policy could become more stimulatory. Indeed, recent press reports suggest that the Government is considering fiscal stimulus measures. Some press reports have indicated that this could include a delay to the scheduled April 2017 increase in the Value Added Tax (VAT) although the Prime Minister has stated that it will go ahead unless there a major shock (such as another GFC). The reports indicate that a decision is likely to be made ahead of the G7 summit, being hosted by Japan, in late May 2016.
Against this, the Government has a target of achieving a primary surplus by FY2020. But not even the most optimistic projections suggest that the target will be achieved on current policy settings. History suggests that in the event of a downturn, the target will be sacrificed (or delayed) and stimulus measures introduced, so additional measures would not be a surprise given the lack of momentum in the economy.
While the budget deficit is falling, it remains higher than growth in nominal GDP. As a result Japan’s government debt to GDP ratio, which is already high by international standards (particularly on a gross debt basis), is likely to continue rising.”