Japan’s $1 trillion stimulus misfire

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Tokyo’s numbers impress but its Covid-19 emergency spending is less creative than others have deployed

After weeks of seeming more like a prisoner to events than a bold leader, Japan’s Shinzo Abe grabbed the reins Tuesday with considerable fanfare.

In quick succession, the prime minister declared a state of emergency as the coronavirus outbreak intensifies, and detailed a plan to lessen the economic fallout.

Unfortunately, the moves suffer from a similar problem: both may be too little, too late and both look devoid of creative solutions – especially the stimulus gambit.

On the surface, deploying the equivalent of 20% of the gross domestic product of the world’s number three economy sounds epic. Abe says he will “carry out an unprecedentedly massive scale” of aid to revive growth and confidence in the months ahead.

The nearly US$1 trillion plan trumps Washington’s relative to GDP. America’s recently enacted coronavirus rescue package weighs in at nearly 11% of annual output. Australia is spending about 9.7% of GDP compared with Canada’s 8.4%. Germany’s is 4.9% and France’s 2%. Elsewhere in Asia, Singapore will spend 12% of GDP to stabilize demand, while South Korea is pumping only $84 billion into a $1.6 trillion economy.

By any of these yardsticks, Tokyo is firing a giant “bazooka” at a fast-deteriorating outlook. The reference here is to the Bank of Japan’s efforts to blast liquidity into markets these last several years. Abe’s plan is simple: zap Japan Inc with a fiscal boom far bigger than the combined $670 billion of emergency spending Tokyo did after the 2008-2009 global crisis.

Yet there are at least three immediate reasons to worry that Abe’s firepower will hit off-target.

Unanswered questions

One, some of the 108 trillion-yen Abe’s team says it’s deploying includes at least $238 billion of measures rolled out late last year to ease the pain from the US-China trade war. Perhaps even bigger portions of this “new” spending will be part of previous packages.

Two, the sequencing is unclear. The blast comes in two phases. The first includes business subsidies, payouts of $2,757 to some lower-income families and certain deferrals of property and business taxes. But the second – which includes help for tourism, transport, restaurants, entertainment, etc – would only be spent after the coronavirus is contained, assuming that is this year. That suggests plenty of pain to come.

Third, Abe’s plans are completely devoid of audacity or creativity. Why not scrap last October’s ill-timed 2 percentage point sales tax hike that led to a 7.1% GDP drop in the fourth quarter? Even better, repeal too a 2014 increase, which would cut the levy at 5% from 10% now. That would fire up consumption.

At the same time, Abe should be telegraphing a wave of structural reforms needed to restore confidence in the long run.

To be sure, Abe is right to ramp up stimulus like his peers. But Tokyo’s coronavirus package does more to treat the symptoms of Japan’s malaise than the underlying ailment. Team Abe, in other words, seems a prisoner to conventional thinking at a wildly unconventional moment.

Global benchmarks

Tokyo could borrow some strategies being employed elsewhere.

It could crib from Washington’s plan to send $1,200 payments to most American adults and $500 per child. It could combine these handouts with something akin to the UK government’s plan to pay 80% of monthly employee wages up to about $3,065.

And speed matters. Germany is ramping up efforts to deploy $652 billion of loans to businesses as expeditiously as possible, as well as taking direct stakes in companies and boosting social expenditures.

The European Commission is suspending debt and deficit constraints for members. The European Central Bank, meantime, unveiled a “Pandemic Emergency Purchase Program” to hurry liquidity to where it needed – $815 billion for starters.

Japan could do with this type of fiscal-monetary coordination. Along with the Bank of Japan reloading its bazooka and printing more yen, it should consider its own ECB-like support facilities. To finance this latest fiscal jolt, Abe’s government plans to issue “deficit-covering bonds.” The initial amount is $165 billion. The BOJ could request an okay from lawmakers to hoard some of those IOUs.

The BOJ could work with the Ministry of Finance to incentivize the corporate sector. In recent weeks, the BOJ pledged to up its purchases of corporate debt. Why not do so with a quid pro quo: the BOJ will only buy bonds of companies that commit to avoid mass lay-offs?

In South Korea, for example, President Moon Jae-in’s government is offering 70% of the population handouts. But in Japan’s case, the $2,757 payout will, as of now, only go to households who can prove heavy income drops due to coronavirus fallout.

And Japan should really follow Korea’s lead in another way: testing more of its 126 million people for Covid-19. To date, authorities have tested fewer than 50,000. With the state of emergency, Japan could be at the very beginning of its coronavirus battle, just as neighboring China is reopening for business.

Granted, Chinese claims may be suspect, given the bull market in mainland opacity on President Xi Jinping’s watch. And risks of a second wave of infection abound.

Yet China’s moves to ramp up funding for virus-ravaged regional governments is worth studying. Beijing has been cutting key rates, prodding banks to make cheap loans and offering payment relief to companies in harm’s way. The real emphasis, though, has been on targeting municipal governments overseeing fragile rural economies.

Stimulus? Again?

Japan’s broader problem, of course, is that it’s relied more on stimuli than structural upgrades these last 20 years. As such, new stimuli don’t pack the punch they once did.

What’s really required is deeper change – cutting red tape, modernizing the tax code to favor startups over giant exporters, empowering women, importing more overseas talent and loosening labor markets.

But stasis is powerful. A new Yahoo Japan poll shows that 64% of Japanese workers expect no change in routines even after Abe’s state-of-emergency decree. Japan Inc’s traditions and rigidities are proving impervious to the shelter-in-place orders sweeping the globe.

Bureaucratic bottlenecks

And Tokyo’s notorious bureaucracy will be a huge hurdle to households and families seeking immediate boosts.

There are big “concerns that delivering cash and other types of assistance to distressed households and businesses across the country will be difficult and slow if the process and criteria used to assess eligibility to receive them end up being complex and confusing,” says analyst Scott Seaman of Eurasia Group. “There are also doubts about whether local governments have the administrative capacities to manage the rollout.”

This, Seaman says, “creates significant risk” that Abe’s plan “could still stumble with its implementation. A near-term watchpoint in this regard is how quickly and efficiently it delivers cash to individual households, a process it wants to get started as soon as possible in May.”

At the same time, notes economist Masaki Kuwahara of Nomura Securities, how do you convince consumers that the economy will end 2020 more vibrantly than the year began? Already, he says, “many people are refraining from going shopping.” How, then, does Abe “prevent a second-round effect” of economic insecurity that depresses growth?

The roughly $55 billion Abe’s package sets aside for traumatized households and small-and-midsize firms won’t gain much traction if recession fears persist. All of which argues in favor of Abe’s team complimenting short-term stimulus with moves to increase longer term growth.

Japan limped into 2020 thanks to a sales tax hike enacted amid a trade war. That self-inflicted wound is even more damaging in retrospect as the globe experiences the human equivalent of a credit crunch. Delaying the 2020 Tokyo Olympics by a year will cost, conservatively, $6 billion of losses.

This unprecedented predicament demands serious out-of-the-box thinking. That is not visible in Tokyo’s response.

 

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