Japan's stimulus measures: Large in scale, fiscal measures not a surprise - Nomura

Nomura's Japan Economics Team shares their take on the recent announcement by PM Abe that Japan's stimulus measures are set to be over ¥28trn, ¥13trn of which will be in fiscal measures. In their view, this appears not a major surprise, adding that details are still unclear, with economic boost unlikely to increase for time being.

Key Quotes

Kyodo News and others have reported that Prime Minister Shinzo Abe announced in a speech on 27 July that economic stimulus measures would come to over ¥28trn. The 27 July morning edition of the Nikkei reported that the overall package would ultimately come to around ¥20-30trn, and the size of the stimulus measures announced is within that range, albeit towards the top.

The date given for Cabinet approval for the stimulus measures was 2 August. Mr Abe may have decided to make a snap announcement about the size of the stimulus package because government and ruling coalition talks went smoothly, but it may also have been because he wanted to move in step with additional easing from the Bank of Japan expected on 29 July.

Fiscal measures, in other words the total of new spending by the central/local governments and funds under the Fiscal Investment and Loan Program (FILP), are put at ¥13trn. This is not much different from the ¥12trn in fiscal measures (around ¥6trn in new spending and ¥6trn under the FILP facility) projected based on media reports through 26 July. It is possible that only around ¥2trn of the fresh expenditure of ¥6trn would be allocated to the second supplementary budget for FY16, with the remainder allocated to FY17 onward.

Based on media reports through 26 July, the ¥15trn in the package other than fiscal measures will likely include loans by government-affiliated financial institutions and spending on projects by private-sector corporations receiving state subsidies. Given the lack of demand for funds despite monetary easing that has taken long-term interest rates into negative territory, it is unclear how much additional private-sector demand government subsidies and low-interest rate loans using public credit will generate. The numbers in the economic stimulus package look like being large on paper, but we think caution is needed when considering the near-term boost to the economy.

The Wall Street Journal reported on 27 July that the Japanese government is considering issuing 50-year JGBs. If this is true and the BOJ moreover decides to increase its JGB purchases at its monetary policy meeting on 28-29 July, it could be associated with "helicopter money" by opening a way for the BOJ to hold JGBs with long durations. However, Bloomberg has reported that Ministry of Finance officials had said that issuance of 50-year JGBs was not being considered. We see little likelihood of a clear helicopter money policy being adopted this week, and see no need to change that view