INSIGHT: Abe buying time before economic growth strategy

January 12, 2013


Prime Minister Shinzo Abe’s economic stimulus package--funded by a near record amount of debt--is loaded with public works projects to quickly bolster the economy and gain breathing room for decisions on longer-term issues.

In announcing the package on Jan. 11, Abe stressed the need for immediate results.

"We emphasized public works projects that can be implemented as quickly as possible as well as measures that will lead to an early expansion of the market," he said at a news conference.

With the economic stimulus measures focusing on reconstruction and disaster management, the central government hopes its spending can lead to a rise in corporate profits and workers’ salaries.

Abe has a strong desire to increase the real growth rate for gross domestic product in the April-June quarter. After becoming prime minister, Abe told Taro Aso, who is concurrently deputy prime minister, finance minister and state minister in charge of financial services, to come up with measures that would show improvements in the second quarter.

The GDP growth rate in that quarter will be an important factor in determining if the consumption tax rate, currently at 5 percent, can be raised to 8 percent from April 2014. Abe also wants positive results before this summer's Upper House election.

The stimulus measures cover not only construction of social infrastructure, including repairs of old roads, but also steps to further increase defense spending, as Abe has promised to do.

In explaining why a measure was included to replace radio transceivers for the Self-Defense Forces, Defense Minister Itsunori Onodera said at a Jan. 11 news conference, "It will lead immediately to greater private-sector demand."

Another item that had little apparent connection to stimulating the economy was the purchase of Patriot Advanced Capability-3 surface-to-air guided missiles.

The economic policy called “Abenomics” stresses expeditious fiscal spending, which was reflected in the expansion of public works projects.

However, some measures within the economic stimulus package were carried over from the time when Aso was prime minister.

For example, one measure calls for expanding the range of entertainment spending that companies can report as deductible expenses. Another measure calls for revisions to the gift tax to exempt assets given by grandparents for the education of their grandchildren.

"While companies have a considerable amount of reserve funds on hand, they are not using it for investment or for workers' salaries," Aso said at his Jan. 11 news conference.

Another Abenomics measure similar to a program Aso established when he was prime minister is a tax grant program. Under that plan, the central government will shoulder the burden for public works projects that would normally be paid for by local governments.

Finance Ministry officials initially balked at the proposal because it would increase the central government’s burden. But Aso, who once served as internal affairs minister, convinced them by saying, "This is the measure that is most being sought by local government heads."

The total package of central government spending, local government spending and credit guarantees for financial institutions reaches 20.2 trillion yen ($227 billion).

Abe told reporters on Jan. 11 that the level of spending was unlike any in the past, indicating that his administration would emphasize economic growth, rather than rebuilding the nation's fiscal condition, a concern of the predecessor Democratic Party of Japan government.

That switch means a return to the Liberal Democratic Party’s emphasis on public works projects. About half of the 10.3 trillion yen to be included in the supplementary budget for the current fiscal year will go to public works projects.

Because the LDP and coalition partner New Komeito pledged in the December Lower House election campaign to implement economic stimulus measures totaling 10 trillion yen, central government ministry sources said every effort was made to reach that figure, even if it meant some measures were included that may not be immediately necessary.

To help pay for the supplementary budget, the issuance of government bonds for the current fiscal year is expected to rise from 44 trillion yen to 52 trillion yen. In terms of size, that would be second only to the amount issued in fiscal 2011 to pay for the reconstruction budget to deal with the Great East Japan Earthquake.

The three pillars of Abenomics are fiscal spending, bold monetary easing measures and a growth strategy. Plans call for compiling the growth strategy by June.

"The market will be watching to see if the administration can come up with a growth strategy while it gains time through its economic stimulus measures," said Junichi Makino, chief economist of SMBC Nikko Securities Inc.

(This article was compiled from reports by Jun Tabushi and Eiji Zakoda.)

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Shinzo Abe explains the package of economic stimulus measures at a news conference on Jan. 11. (Teruo Kashiyama)

Shinzo Abe explains the package of economic stimulus measures at a news conference on Jan. 11. (Teruo Kashiyama)

  • Shinzo Abe explains the package of economic stimulus measures at a news conference on Jan. 11. (Teruo Kashiyama)

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