Can A Fiscal And Monetary Splurge Reboot Japan’s Recessionary Economy?

Japan's Prime Minister Shinzo Abe attends a news conference at his official residence in Tokyo

Source: Economist – Keynes, trains and automobiles

Notable Excerpts:

As promised, on January 10th Mr Abe approved a massive public-spending bonanza, expected to exceed ¥13 trillion ($150 billion)—more than was spent in emergency measures after the 2011 earthquake, and about 2.6% of GDP.

Much of the cash will go towards making tunnels, railway lines and other infrastructure safer. Those are the sort of public-works projects that Mr Abe’s Liberal Democratic Party (LDP) was famous for during much of post-war Japan’s history. His supporters believe it will help jolt the economy out of recession. Critics argue that it is a rehash of the concrete-slathering policies that helped saddle Japan with the biggest public debt in the world.

It is being accompanied by pressure on the Bank of Japan (BoJ) to print more money to weaken the yen and help exporters, such as Japan’s carmakers and electronics firms.

In principle, there is nothing wrong with the plan, provided that the government’s spending generates higher returns than the borrowing costs. Robert Feldman of Morgan Stanley says that if the money is spent well, on projects like energy-saving technologies, the rewards could be huge, bolstering efficiency and tax revenues.

But if the cash is wasted on projects with no economic merit, it will add to a gross public debt without materially boosting output, raising a debt-to-GDP ratio that already exceeds 200%. Although deficit-financed stimulus is justifiable in the short run, Mr Abe has spoken of the need for ¥200 trillion of public works over the next ten years, with less talk of how to pay for it. Those sums easily exceed the additional ¥12.5 trillion a year that Japan hopes to collect by eventually doubling the consumption, or sales, tax.

For now, the financial markets are happy. In just over a month, the stockmarket has climbed by 10%. It has been pushed higher by a weakening currency, with the yen falling from around 82 per dollar to 88 in the same period.

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