Japan’s JPY 28tn stimulus disappointed markets with little government spending:Drag from investment

Comment:

    As details for Abe’s JPY 28 tn fiscal stimulus package were released, markets were leftdisappointed as the actual impact of the fiscal stimulus likely fell well short ofexpectations, and as the JPY 28 tn figure was highly inflated; the JPY appreciated, andJGB yields rose following the release of the details. There were several main reasonsfor the disappointment.

    Firstly, over half of the fiscal stimulus package was on unspecified non fiscalcomponent measures, which included other loans and private investment which waslikely going to occur regardless of the most recent stimulus announcement.

    Secondly, among the actual JPY 13.5 tn of fiscal measures, just over half was in directgovernment expenditures, while the other half also included low interest loans from theFILP which targeted SMEs, hospitals, and welfare facilities; given low market interestrates, the stimulus effect of these measures is very limited.

    Thirdly, direct government expenditure on high fiscal multiplier areas such as boostingwelfare, infrastructure, and reconstruction spending ended up at near just a quarter ofthe JPY 28 tn headline number originally promised. With that said, despite thedisappointment overall, fiscal stimulus measures are nonetheless likely to create asupportive effect on demand, and likely to have a higher efficacy compared to monetarypolicy measures.

    We maintain our 2016 GDP forecasts to 0.4% YoY for now, as direct governmentspending is likely to slightly pick up from 2015 but JPY appreciation, falling corporateprofits, and external risks may drag growth. However, risks are balanced toward growthoutperforming our forecast, particularly if a significant portion of the JPY 4.6 tn fiscalspending over FY2016 falls into the 2016 calendar year. Pressure remains on the BoJand Japanese government to provide further easing later on in the year.