Ja­pan's $190 bil­lion stim­u­lus Aims at bol­ster­ing econ­omy: Aso

The Pak Banker - - MARKETS/SPORTS -

Ja­pan is craft­ing a mas­sive spend­ing pack­age worth about $190 bil­lion to bol­ster the econ­omy - about dou­ble the size ini­tially floated - but a close ex­am­i­na­tion shows ac­tual pub­lic spend­ing will be far less than the head­line num­ber sug­gests.

Prime Min­is­ter Shinzo Abe, fresh off a big elec­tion win, last week or­dered his gov­ern­ment to cre­ate a stim­u­lus plan to re­vive an econ­omy dogged by slug­gish con­sump­tion and in­vest­ment, de­spite three years of his "Abe­nomics" mix of hy­per-easy mon­e­tary pol­icy, spend­ing and promised re­forms.

The pack­age will have a head­line fig­ure of at least 20 tril­lion yen ($186.55 bil­lion), three gov­ern­ment sources said Thurs­day. But de­spite the star­tling head­line fig­ure - equal to more than 4 per­cent of gross do­mes­tic prod­uct - real gov­ern­ment spend­ing to boost eco­nomic growth is ac­tu­ally in line with or smaller than pre­vi­ous ex­pec­ta­tions.

"Over­all, it seems like a pa­per tiger," said Ken­taro Sugiyama, se­nior econ­o­mist at No­mura Se­cu­ri­ties.

About half of the nom­i­nal 20 tril­lion yen is ex­pected to come from a com­bi­na­tion of di­rect spend­ing from both na­tional and lo­cal gov­ern­ments and the Fis­cal In­vest­ment and Loan Pro­gramme (FILP), about 3 tril­lion yen and 6 tril­lion yen, re­spec­tively.

The other half, gov­ern­ment sources say, is ex­pected to come from pri­vate sec­tor firms that get state sub­si­dies and lend­ing from quasi-gov­ern­ment fi­nan­cial in­sti­tu­tions.

The pack­age could ex­pand dur­ing talks with Abe's rul­ing coali­tion be­fore his cabi­net ap­proves the mea­sures on Aug. 2.

"The fine print is al­ways the same, about 2.5 tril­lion yen to 3.5 tril­lion yen of real fis­cal thrust," said Jes­per Koll, CEO at fund man­ager Wis­domTree Ja­pan.

"The cre­ativ­ity with which this can be spun out to gen­er­ate any­where from 8-20 tril­lion is truly ad­mirable," he added.

FILP loans are fi­nanced by gov­ern­ment bonds and must be paid back out of the re­cip­i­ent com­pany's prof­its.

Such loans are not in­cluded in bud­get num­bers and tech­ni­cally don't in­crease Ja­pan's debt, which is al­ready more than twice the size of the econ­omy,

LDP gov­ern­ments have a long tra­di­tion of in­flat­ing the head­line fig­ure of stim­u­lus pack­ages and there is even a word to de­scribe the real spend­ing com­po­nent - "mamizu" or "fresh wa­ter".

"The 20 tril­lion yen head­line fig­ure is not very sig­nif­i­cant. What mat­ters is how large the ' mamizu' por­tion will be," said Hi­de­nori Suezawa, fis­cal and mar­kets an­a­lyst at SMBC Nikko Se­cu­ri­ties.

The gov­ern­ment, which be­gan lay­ing the ground­work for the pack­age as a ris­ing yen threat­ened ex­ports and wor­ries about the global econ­omy abounded, may have felt a need to in­flate the head­line fig­ure be­cause mar­ket ex­pec­ta­tions were high, said Hiroshi Shi­raishi, a se­nior econ­o­mist at BNP Paribas Se­cu­ri­ties.

"There is still a chance it could in­crease a bit fur­ther, but the bot­tom line ... is they are not go­ing to is­sue deficit­fi­nanc­ing bonds," Shi­raishi said.

"That ba­si­cally means this will not in­crease sig­nif­i­cantly the amount of hand­outs to house­holds."

The spend­ing is also likely to be spread over sev­eral years, re­duc­ing its im­me­di­ate im­pact, while doubts per­sist over how much pri­vate in­vest­ment will re­ally rise given funds are al­ready easy to ob­tain due to al­ready rock-bot­tom in­ter­est rates. What­ever the source, much of the spend­ing looks to be tar­geted at in­fras­truc­ture projects, such as port im­prove­ments and speed­ing up con­struc­tion of an ul­tra-fast "ma­glev" train line from Tokyo to Osaka. One LDP law­maker said the pack­age likely in­cludes a FILP loan of 3 tril­lion yen over three years for the ma­glev pro­ject. That has some an­a­lysts won­der­ing just how much it will con­trib­ute to long-term growth.

"What mat­ters is whether there are poli­cies to ad­dress the shrink­ing, age­ing pop­u­la­tion and glob­al­i­sa­tion," SMBC Nikko Se­cu­ri­ties' Suezawa said. "With­out poli­cies linked to the longterm growth of Ja­pan's econ­omy, it could have lit­tle im­pact and just worsen pub­lic fi­nances."

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