Now that elections in Japan's upper house are over, Tokyo has turned its attention toward getting the country's sluggish economy on track. Japanese Prime Minister Shinzo Abe announced Wednesday a 28 trillion-yen (5 billion) stimulus package that includes 13 trillion yen in fiscal measures. The stimulus, which has been under discussion for months, will likely be approved by the Japanese Cabinet on Aug. 2. In addition, The Wall Street Journal reported that the country is considering issuing 50-year government bonds for the first time since World War II, although a Ministry of Finance official quickly denied the report.
Several facets of the stimulus proposal are unclear, such as how much of it includes new spending versus programs already planned and announced. It was also not specified how much additional spending will fall under the 2016 fiscal year budget. In any case, Abe and his government have made it clear that they have every intention of breathing new life into Abenomics, which has suffered in recent months as inflation has declined, economic growth has sagged and the yen has appreciated.
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Three principles guide Abenomics: a flexible fiscal policy that includes stimulus, an aggressive monetary policy, and structural reform. The third principle, in theory, would aid the Japanese economy's long-term growth prospects, but in the interim, the primary tools being used are monetary and fiscal stimulus — and they are growing dull with use. Japan seems increasingly unlikely to meet its goal of fiscal consolidation by 2020 considering increasing spending this year and the continued delays in enacting structural reform and fiscal stimulus. Though the headline figure for the stimulus package is 28 trillion yen, the actual amount of new spending and additional stimulus is likely to be far lower. Some more bearish forecasts have estimated the stimulus will be just a tenth of the touted amount, thanks to Japan's struggles in raising revenue after a sales tax hike was postponed and its struggles with an already high debt burden.
A more aggressive monetary policy remains in the Bank of Japan's quiver, even if its arrowhead is growing more blunt. Indeed, the timing of the announced stimulus package is peculiar. On Thursday and Friday, the central bank will hold its next monetary policy meetings and could announce more quantitative and qualitative easing (QQE) or a further lowering of interest rates.
Japan's QQE program relies on annually expanding the country's monetary base by 80 trillion yen and buying a matching amount of Japanese government bonds as well as purchasing smaller amounts of other assets, such as exchange-traded funds. But in several of these markets, the Bank of Japan's ownership share of assets is reaching its limits. The bank already controls roughly a third of Japanese government bonds and will likely need to begin tapering off on its bond purchasing program sometime within the next two years. Though the bank can certainly increase the bond-buying aspect of its easing program in the short term, a different longer-term solution will be needed, and the Bank of Japan will explore alternatives. During its policy meeting in January, the bank for the first time introduced a limited negative interest rate, a move that has proved to be unpopular. A more aggressive application of negative rates is certainly one option open to it.
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Among the other possibilities, the idea of "helicopter money," or direct cash transfers to the public, has been discussed frequently. Bank of Japan Gov. Haruhiko Kuroda's warning that helicopter money in the form of direct financing of the government deficit by the central bank is illegal under the Japanese Constitution has not killed the discussion. Japan could conceivably skirt the legalities and employ the strategy as a de facto policy.
One proposed way of doing this has been by issuing perpetual bonds with no coupons or maturity date that the Bank of Japan would buy up and hold indefinitely. The idea of 50-year bonds could be a step in that direction. At its heart, any kind of helicopter money policy would require coordination between the central bank and the Finance Ministry on monetary and fiscal expansion. While helicopter money may not be on the table just yet, as the efforts to make Abenomics work progress, similar creative solutions are bound to be proposed and implemented.
The curious timing of the announcement of the stimulus package before the Bank of Japan's meetings — it was not expected to come before Friday — has demonstrated how the bank and Abe have been forced to more closely coordinate their moves post-Brexit. In any case, the ball is now in the bank's court, and Friday's monetary policy announcement will draw close attention.
"The Curious Timing of Japan's Stimulus Announcement" is republished with permission of Stratfor.
