Photographer: Noriko Hayashi/Bloomberg

Talk of Looser Fiscal Policy Grows Within Japan's Ruling Party

  • One of Abe’s advisers urges 10 trillion yen extra budget
  • How to pay for this is a big problem as Japan’s debt swells

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With its popularity in free-fall, there is increasing talk within Japan’s ruling party that the government should increase spending this year, with some lawmakers even suggesting cutting the sales tax and reversing efforts to impose fiscal discipline on the heavily-indebted country.

"Fiscal policy is indispensable for a recovery," said Satoshi Fujii, an adviser to Prime Minister Shinzo Abe and a long-time advocate of greater fiscal stimulus. More spending will help the administration’s flagging support rate, Fujii said in an interview this week, adding that a supplemental budget focused on investing in human capital and economic growth was needed this year if the government wants to meet its goal of creating a 600 trillion yen ($5.2 trillion) economy.

His argument is finding support among some of the Liberal Democratic Party’s rank-and-file, who feel that excessively tight fiscal policy has stymied growth and prevented Japan’s recovery from spreading to households. A group of 28 younger lawmakers called for the consumption tax to be frozen or cut, not raised as planned in 2019, and for the government to abandon its target of a primary balance surplus in fiscal 2020.

"The second arrow of Abenomics was fiscal stimulus, and we did it the first year, but not after that," Hiroshi Ando, the lawmaker who represents the group, said in an interview last week. "I’ve always thought the second arrow was the key to Abenomics, but we only tried it once. That won’t stimulate the economy."

The proposals for increased spending are part of a debate over whether Japan can spend it’s way out of its debt by stimulating growth and inflation, or if it needs to cut spending and raise taxes to start paying down the borrowings. Although the government has a stated aim of reaching a primary budget surplus in 2020, this is impossible even by its own estimates and the initial spending total for this year is at a record high.

Expectations for an extra budget have grown with the decline in support for the Abe government, partly seen in the LDP’s massive defeat in the Tokyo metropolitan election earlier this month. However, any looser fiscal policy will run into an immediate problem -- how to pay for it.

Debt Load

Weak tax revenues last year mean that only 378 billion yen remain unspent, hardly enough for a meaningful stimulus package. So any large-scale spending would have to be financed by borrowing, adding to the existing debt.

Even though the rise of total debt has slowed, it’s more than twice the size of Japan’s gross domestic product, and exceeds the combined economies of France, Germany and the U.K. And a declining population means that the remaining people are on the hook for a larger and larger amount.

"The Tokyo election increases the likelihood of greater fiscal spending," said Takuya Hoshino, deputy chief economist at Dai-Ichi Life Research Institute. However, "they won’t be able to include much new spending. Even 3 trillion yen would be tough," he said, adding that "even if they want to spend more, the lack of a source of funds and the fiscal consolidation target present real dilemmas."

That hasn’t deterred the advocates of greater spending. Ando wants a supplemental budget of about 10 trillion yen. "It has to be big enough to surprise people and show that it’s serious," he said. The number lines up with what Fujii believes necessary to prove effective.

Seeking Support

It’s unclear how much influence Ando’s group will have, as the 28 members are a small portion of the LDP’s 400-plus parliamentary caucus. However, their written proposal was accepted by Deputy Chief Cabinet Secretary Koichi Hagiuda and Yasutoshi Nishimura, as representatives of the government and LDP respectively. The group also plans to submit it to LDP Secretary General Toshihiro Nikai.

But not everyone in the LDP is prepared to entertain the idea.

"The most important thing for Japanese politics to tackle is fixing fiscal and economic policy," said Seiichiro Murakami, a lawmaker and former minister for regulatory reform. "We’re putting everything on the tab of the next generation -- fiscal and monetary policy, the social safety net, everything." 

He also criticized the Abe administration for twice delaying the increase in the consumption tax, saying "they don’t understand anything."

— With assistance by Isabel Reynolds, and Takashi Hirokawa

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