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Jan 3rd 2015
IF YOUR first shots miss the target, keep firing. That seems to be the lesson
in Japan, where the cabinet of Shinzo Abe, the prime minister, approved an
emergency stimulus package worth 3.5 trillion ($29.1 billion) on December 27th
to pep up the recession-hit economy. Yet what stood out was the diminished heft
of the package. Nearly two years ago the first of three arrows , as the
various parts of Mr Abe s programme have been dubbed, was a fiscal boost of
10.3 trillion, followed by another spending package worth 5.5 trillion in
April 2014. The other facets of Abenomics will now have to be exploited.
The government hopes that its meagre package will boost Japan s real GDP by as
much as 0.7% in 2015-16. Although more modest, the stimulus is more finely
targeted this time, notes Robert Feldman of Morgan Stanley, an investment bank.
A third of the total is to go on helping small businesses and households
particularly hard hit by the effects of a weak yen and a squeeze in real
incomes, both side-effects of Abenomics itself. Measures will include handing
out shopping vouchers to the poor and subsidies for heating oil.
Another of Mr Abe s aims is to spread the growth-boosting effects of his
policies a combination of quantitative easing by the Bank of Japan, fiscal
stimulus and structural reforms right across the country. So far, Tokyo has
lapped up the benefits; a further 600 billion will therefore go on trying to
rev up local economies, including an attempt (surely ill-fated) to draw people
away from the capital to the countryside. The largesse should aid Mr Abe s
Liberal Democratic Party (LDP) as it faces nationwide local elections in the
spring.
The remaining 1.7 trillion will go on a traditional speciality of the LDP:
public-works spending. Outlays on infrastructure, including reconstruction
after the tsunami-cum-nuclear meltdown of 2011, could boost GDP more directly
than handouts to households and small firms, since businesses may pocket the
cash rather than embark on new spending. Yet the effect may be more muted than
the government intends. The flow of stimulus money into the economy is being
hampered by labour shortages in the building industry; public-works spending
even fell slightly in the second quarter after a tax increase, contributing to
a contraction in economic output. The IMF recently noted that both the
implementation of planned public works and their effectiveness in boosting the
Japanese economy have declined over time.
Japan in graphics: An examination of the country's troubled economy and
demographics
The handout hardly helps to meet the government s target of halving the primary
deficit (which excludes interest payments on debt) from 6.6% of GDP in 2010 to
about 3.2% in 2015. Fiscal hawks complained that the last package, of 5.5
trillion, consumed two-thirds of the proceeds from a rise in the consumption
(value-added) tax. A further increase has been postponed from October 2015 to
April 2017. In December Moody s downgraded Japan s debt, though markets barely
reacted, having factored in the central bank s strong support for the bond
market.
Since Japan s public debt is approaching 245% of GDP, the size of stimulus
packages will surely be constrained in future. The Bank of Japan has already
done a huge amount on the monetary front. That leaves Mr Abe short of
ammunition. Political constraints make his so-called third arrow reforms to
Japan s inefficient agriculture, health-care and labour markets hard to fire.
It is fast becoming his only hope.