International | Apr 15 2009
By Chris Shaw
With the Japanese economy one of the worst performing major economies in the world in recent months something had to be done and it has been, the government this week announcing a new fiscal stimulus package worth 15.4 trillion yen, which is equal to around 3% of GDP.
As Standard Chartered notes this makes the package the largest stimulus measure in Japan’s history and on government estimates should add as many as 500,000 jobs and push up GDP by as much as 2% in the financial year ending March 31st, 2010.
Standard Chartered also notes not all of the announced stimulus will actually make it into the economy as some of the measures rely on contingencies that may not happen. Even allowing for this, Standard Chartered sees the package as offering enough direct spending and income injection measures to actually boost the economy overall, forecasting a 1.2% GDP boost this fiscal year.
This means post the release of the package the group continues to expect the fall in GDP will slow in the second half of this year. However, the key remains whether the package is enough to generate sustained growth, especially given increasing fears of deflation are again surfacing in Japan.
The price declines emerging in both the corporate and producer levels at present are, in Standard Chartered’s view, at a pace equal to previous deflation cycles and appear to be a more than one-off adjustment to the commodity price spike last year. These rising deflation risks increase the chances the stimulus measures end up being saved rather than spent, so diminishing the impact of the package overall.
Given such an outlook, the group sees pressure shifting back to the Bank of Japan (BoJ) as while to date the central bank has resisted full scale quantitative easing measures, the looming spectre of deflation means credit demand could well be restrained given a perceived increase in real interest rates.
The solution in the group’s view is for a shift in monetary policy by the BoJ to provide price anchoring for the entire economy, as the newly announced package gives the fiscal boost to make such a move more effective.