Japanese economy needs far bigger jolt

JAPAN - With the government's second set of economic measures giving more of a buzz than a jolt to the flagging economy, attention is already turning toward a full-scale economic package to be compiled by the new administration after the upcoming general election.

As political parties are calling for a large-scale supplementary budget, it remains to be seen how such a massive stimulus will be funded.

The second package, with was decided Friday, is being financed from leftover reserve funds from the 2012 budget.

At a Cabinet meeting Friday, Prime Minister Yoshihiko Noda indicated it was the largest the current administration could come up with.

"While maintaining fiscal discipline, we considered every option and compiled measures for economic recovery and reconstruction of the areas devastated by the Great East Japan Earthquake," he said.

The measures, which were hurriedly put together ahead of the lower house election on Dec 16, comprise about 1.2 trillion yen (S$0.02 trillion) in project costs, including those shouldered by local governments.

The central government will cover about 880.3 billion yen of the expenses.

Though the latter figure is larger than the 750 billion yen in the first package decided in October, a government estimate shows the second package will push up the nation's real gross domestic product by only about 0.2 per cent.

Although Noda wanted to compile a supplementary budget, he was limited to the reserve fund as he could not count on cooperation from opposition parties.

New Komeito leader Natsuo Yamaguchi said at a party leaders' debate on Friday, "A large-scale extra budget worth 10 trillion yen should be implemented."

Noda agreed with Yamaguchi, saying: "It's imperative to compile a full-scale supplementary budget as soon as possible. I think economic stimulus is needed."

The Liberal Democratic Party also supported the idea.

LDP Policy Research Council Chairman Akira Amari said, "Though the Finance Ministry said the scale would be 4 trillion yen to 5 trillion yen, that won't do."

It has thus become inevitable that a large-scale extra budget will be compiled.

The DPJ, the LDP and Komeito, which took leading roles in deciding to raise the consumption tax rate, are eager to put together a supplementary budget to demonstrate their intentions to voters ahead of the election.

The budget is also aimed at preventing the economy from deteriorating further ahead of the increase in the consumption tax rate from 5 per cent to 8 per cent in April 2014.

Before the tax rate hike takes effect, the government will determine whether the rate should be raised based on evaluations of economic conditions around autumn 2013.

For instance, the real GDP's growth rate during the April-to-June quarter of 2013, to be released in August next year, will be an important factor in the administration's decision.

The parties have high expectations that the supplementary budget will provide a much-needed boost to the economy.

For the first and second economic stimulus packages in this fiscal year, the government will have spent the entire 910 billion yen reserve fund set aside for emergency economic measures.

The reserve fund for post-disaster reconstruction stands at just 60.4 billion yen.

Remaining funding sources for the government are limited to 2 trillion yen surplus money carried over from fiscal 2011 and part of a reserve fund for interest payments on government bonds, which became unnecessary due to a drop in interest rates.

In compiling a large-scale supplementary budget, it is widely viewed within the government that new bonds should be issued.

With the government under increased pressure to boost spending, the LDP says in its election pledges that if it regains power, it will adopt a more flexible economic and fiscal management policy over the next few years.

However, if this happens, it would go against a government-set fiscal reconstruction rule that limits the new issuance of government bonds to 44 trillion yen a year.

The challenge will thus be how to maintain fiscal discipline while compiling a new budget.

In addition, the next administration will have to compile a draft of the fiscal 2013 budget as quickly as possible.

It remains to be seen how effective an extra budget put together in a limited period of time can be.