The 2nd Arrow of Mr Abe’s ambitious program set up back in 2013 is having a second shot in the arm.
On December 5th, the Japanese Cabinet approved a whopping 26 trillion JPY (240 billion US$) economic stimulus package. This package includes 13.2 trillion JPY in fiscal spending, composed of. 9.4 trillion government spending (real money) and 3.8 trillion injected in the fiscal investment and loan program (FILP). The remainder is accounted for by private-sector spending, loan guarantees and other items. Clearly Japanese authorities want to support a slowing domestic economy in the face of flagging global growth and a potential impact from the recent tax hike.
It is interesting to note that Japan has taken the lead among all developed nations with this large fiscal stimulus, while economist still debate how much Germany or any other developed economy shall spend in this low economic growth environment.
Although it is difficult to compute the indirect (i.e. multiplied) impact on the economy and on Japanese corporations that this package will have, Japanese authorities wanted to adopt a preventive plan given the uncertainties the US-Sino trade war among other fears.
Some experts expect the impact on GDP growth for 2020 and 2021 of 0.6% and 0.1% respectively, while the impact on Operating Profits (OP) among listed companies in Japan to be about +1.2% of the consensus projection for March 2021. Quite encouraging considering the consensus expectations of those same profits to grow by about 4% or below.
Admittedly, Japan runs a large government deficit and its gross debt is large. Yet, it is our conviction that monetary expansion has reached its limits (as indeed it can be argued that it also had in other developed countries). What major developed countries need now is some additional spending that involves a larger spectre.
With the help of the Bank of Japan, the country can probably spend more given the low level of inflation, the control of its currency and the domestic ownership of its debt. With Japan’s government debt mostly in the hands of domestic investors and the BOJ, the risk of spending appears smaller as compared to the one of not spending. In some aspects, this looks like a revised version of the Modern Monetary Theory (MMT) even though Japanese authorities would probably deny it.
All in all, in a globalised world of growing inequalities, where the fear of commercial wars is omnipresent, we think that Japan is taking the correct approach in this low growth economic context.
Coupled with the ongoing revolution in Corporate Governance, it should not take too long for investors to waken up to the new Japanese reality.
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