Cabinet approves ¥26 trillion stimulus package to prop up slowing Japanese economy

Cabinet approves ¥26 trillion stimulus package to prop up slowing Japanese economy

Prime Minister Shinzo Abe’s Cabinet approved on Thursday an economic stimulus package totaling ¥26 trillion ($239 billion), to support a slowing domestic economy in the face of flagging global growth and a potential impact from the recent tax hike.

The first stimulus package in three years centers on measures to spark consumer spending, by promoting cashless payments as well as spending on public works to bolster infrastructure in the wake of the recent string of natural disasters, the government said.

“We have crafted a powerful policy package aimed at … helping overcome economic downside risks,” Abe said in a meeting with senior officials of his government and the ruling parties.

The total stimulus package consists of ¥7 trillion for disaster restoration, ¥7.3 trillion for addressing the downside risk of the economy and ¥11.7 trillion for preventing a sharp drop in public works spending after the Tokyo Olympics and Paralympics next year. The economic package will help “ease the pain to some extent … and keep consumption from stalling,” said Shunsuke Kobayashi, senior economist at Daiwa Institute of Research.

But the package will not be effective enough to boost personal spending, he said, adding that the tax increase is expected to slash Japan’s gross domestic product by 0.4 percentage point.

The spending, which compares to ¥28.1 trillion in the previous stimulus package in 2016, will be financed by an extra budget for fiscal 2019 as well as the fiscal 2020 budget, both of which will be drafted this month.

The package centers on public sector spending of ¥13.2 trillion, including low-interest loans, mainly to bolster infrastructure following recent natural disasters, the sources said.

Japan posted the lowest quarterly economic growth in a year in the July-September period with a 0.2 percent rise on an annualized basis, as the slowdown in the Chinese economy amid the trade spat with the United States dented exports.

The world’s third largest economy is now threatened by the Oct. 1 consumption tax hike, from 8 percent to 10 percent, which the Bank of Japan has estimated will generate a net burden of ¥2.2 trillion on households in fiscal 2020, which starts in April.

The country also faces uncertainty over the impact of the United Kingdom’s planned exit from the European Union, and tensions in the Middle East.

Last month the Organization for Economic Co-operation and Development lowered its global forecast for global economic growth to 2.9 percent in 2020, from its previous outlook of 3.0 percent, adding that global growth could be weaker.

The package will also include government measures to help expand farm product exports, as a bilateral trade agreement between Tokyo and Washington is set to take effect next year.Among other steps, the government will help people in their 30s and 40s, who have been struggling to find jobs due to past economic slowdowns, to land new jobs. The government will increase job training services for those age groups, which were severely affected by Japan’s deflation-hit economy from the late 1990s.

As part of economic steps to spur consumer spending, the government launched a program to give rebates for cashless payments at small shops from October through June next year, for which it will set aside about 280 billion yen.

This will be followed by another measure to stimulate personal spending, set to cost several hundred billion yen. The government is considering to provide ¥5,000 worth of points to spend at stores across Japan to consumers who load ¥20,000 onto their account for smartphone payments, starting in September next year, according to people familiar with the matter.

But economists argue that massive spending could crimp efforts such as the recent consumption tax hike aimed at improving Japan’s fiscal health, which is the worst among major industrialized economies.

The package also aims to improve labor conditions, support small companies and promote advanced technology development.

The government plans to provide subsidies to small and medium-sized companies to spur their capital spending, while supplying more computers to public schools.

It seeks to support companies in developing wireless technologies that will follow 5G networks.

The extra spending comes amid rising awareness around the world that more government help is needed to keep economies growing in the face of a global slowdown, which is exposing the limits of relying on central banks to do the heavy lifting of economic management.

“In any country, the positive impact of extra monetary stimulus is limited, which is especially true in Japan and Europe where rates have turned negative. You have no effective choice but to execute fiscal measures to support growth,” said Harumi Taguchi, Tokyo-based principal economist at IHS Markit.