Abe’s stimulus plan needs wise approach

Japan has taken a bold step and Abenomics is once again at play. But will it yield the desired results? This is a pertinent question which has no easy answer. On Wednesday, Prime Minister Shinzo Abe announced a 28-trillion yen ($266 billion) economic stimulus package ahead of the crucial Bank of Japan (BoJ) meeting. BoJ is also expected to unveil steps to ease
monetary policy and revive the sagging business confidence.
The fiscal measures that Abe intends to take include government spending. But many analysts tend to believe that such spending will prop up the sluggish economy only in the short-term. The government has limited excess funds and it will be forced to issue new bonds to pay for a large package of new spending. Rather than extra spending and updated infrastructure, Japan – which is debt-ridden — today needs structural economic reforms and deregulation. These reforms — which look at the long-term benefits—will put the country on the right track of economic progress.
Boosted by the big win in the upper-house election on July 20, Abe’s economic stimulus decision reeks of misplaced optimism instead of a studied wisdom. He seems to have forgotten that the poll victory doesn’t mean that Abenomics has won. Abe has to keep the wider picture in his mind. He talks of stimulus when tax revenues are not rising and funds for an extra budget are very limited.
Through this package, Abe wants to beat deflation and kickstart growth. But it is time that Japan takes innovative steps for fiscal stimulus. To achieve this, the BoJ will not just have to devise a broader strategy, but give Abe’s policies the right support. Despite the drawbacks in Abe’s stimulus package, it can succeed if BoJ helps it to strike the right mix in public spending and tax revenues. The central bank has to back boldness with pragmatism. There are talks that BoJ might resort to helicopter money. But it won’t be a feasible idea. Japan needs real monetization of infrastructure stimulus, rather than conventional infrastructure stimulus.
The third largest economy is facing increased debt burden, enormous weight on public consumption and investment. When the last monthly economic data was released, it showed spending by Japanese households falling. Therefore, the monetary and fiscal that are taken should focus on boosting the demand. Besides, the central bank’s target to reach 2% inflation is realistic, but it is
becoming difficult considering the current volatility in the market—mostly triggered by Brexit.
Apart from declining public spending, the plummeting business confidence is also a matter of huge concern. The BoJ’s most recent Tankan survey showed confidence among small firms and non-manufacturers had worsened during the second quarter of the year. It is imperative that a plan is chalked out that helps traders to repose faith in the government. It is true that the yen’s surge has made the nation’s products less attractive overseas. The country’s exporters are losing their competitive edge. The decreasing corporate profits have started reflecting on the wages and household incomes, which is having a ripple effect on the economy.
Abe’s plan to ramp up the stuttering economy looks positive on its face. But the government has to take into account the challenges it will face. These challenges will make the task uphill, but a long-term approach could make it easier.