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The Increased Adoption of Fiscal Stimulus

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The Increased Adoption of Fiscal Stimulus  

 

Japan once warned of how the poor management of macroeconomic affairs could eventually lead to a nightmare. With weak growth in an environment of low interest rates, it is apparent that Japan is not far from waking up to its nightmare. The country’s longest-serving Prime Minister, Shinzo Abe, on Thursday 5th December, got the green light from Japan’s Cabinet to implement a $121 billion worth of fiscal stimulus. “Abenomics” is the term commonly known by the world, referring to the growth-boosting policies since Mr Abe first became Prime Minister in 2012. His focus of revitalising Japan is based on three arrows comprising monetary easing, fiscal stimulus as well as structural reform.  Yet, that his plans have yet to achieve complete success given the joint effects of the following factors. Foremost, Japan’s third quarter economic growth has plummeted to its weakest this year. Retail sales fell 7.1% in October with Japanese consumers holding back on bigger purchases such as cars. This may be in part attributed to the 2% increase in national sales tax implemented in October to 10%. A third factor involves the nation’s declined exports due to softer demand in China fuelled by trade tension with the US.The stimulus program, by far the largest initiative in three years, is crafted to achieve three broad objectives – rebuilding the nation following the typhoon in October, providing economic support following Tokyo’s 2020 Olympics and to curb downside economic threats. Other spending will be allocated to implementing greater digital services in educational institutions and rewarding consumers to pay with credit cards, as a move to minimise the impact of the tax hike. While the use of fiscal stimulus did not come as a surprise, it evoked mixed responses from analysts. On the one hand, Moody’s analyst Steve Cochrane regarded the move to be logical as there are only limited benefits from monetary policy.

On the other hand, analysts were sceptical about the use of fiscal stimulus given the widening deficit the country currently faces. Takumi Tsunoda from Shinkin Central Bank Research Institute regarded the move to be less effective when it comes to boosting the economy, but more useful in aggravating the current situation. Likewise, back at home, RBA’s governor Philip Lowe has established his intention of incorporating fiscal policy prior to resorting to Quantitative Easing. However, a possible disadvantage that may surface as a result of fiscal stimulus will see the likely decline in Australia’s current credit rating. This is because substantial spending which results in the changes in the budget could in turn result in a decline in current rating. Deloitte Access Economics shares the same sentiments given that data revealed that spending is currently at a decade high. To date, Australia is one of the 11 countries that global rating agencies rate AAA. Global economic conditions continue to see countries struggling in an environment of slow economic growth and record-low interest rates. While it is logical for governments to opt for extreme measures deemed appropriate to its economy, it is crucial to ensure that the long-term benefits these yields will surpass that of short-term losses.

 

  

By Caroline Wong 

 

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Caroline Wong

Caroline Wong is a Research Analyst at KOSEC – Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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