Last week’s G7 summit in Japan fell short of producing a coordinated global fiscal stimulus package. But Japan may now believe that there’s an international green light for more aggressive action—despite its parlous budgetary position.
Over the last six months or so, the momentum for a more aggressive global fiscal policy stimulus has been building. The advice has come from a variety of quarters: the International Monetary Fund, the Organisation for Economic Co-operation and Development, several central banks, and some high-profile academics including Professors Joseph Stiglitz and Paul Krugman, to name but a few.
So ahead of last week’s Group of Seven (G7) summit in Ise-Shima, Japan, speculation was rife that a new plan to boost the global economy would be announced, in the form of coordinated fiscal policy. Such collective action would take pressure off global monetary policy, which is already pushing the limits of effectiveness, and forestall any new journey down the route of competitive devaluation, or “currency wars.”
Focus on “Country-Specific” Circumstances
In the end, however, the G7 communiqué fell well short of announcing a coordinated action, stating that the authorities would strengthen their policy responses “taking into account country-specific circumstances.”
While there’s clearly no agreement on any immediate global fiscal action, this statement can be read as an international green light for countries wanting to pursue fiscal stimulus—even for those, like Japan, with parlous budgetary positions. To that extent, the communiqué satisfies one of the objectives of Japanese prime minister Shinzo Abe—gaining a global “tick” of approval for his plan to postpone a consumption tax (VAT) increase that is slated for April 2017.
Mr. Abe also used the forum to push for domestic support too, by drawing parallels between current economic conditions and those just before the Lehman Brothers collapse in 2008, when he spoke at a news conference following the G7 summit. Abe effectively told the local audience that one of his key criteria for the VAT hike delay—another Lehman-like shock—was in danger of being met.
Japan’s Policy Suite
Aside from the VAT delay, how else will Japan use this green light? In our view, a sizable fiscal spending package, perhaps as large as 10 trillion yen (or 2% of GDP), looks set to be announced very shortly. Some of this will be directed towards infrastructure, some to low-income households, and some towards easing supply-side constraints such as increasing pay for childcare workers.
The headline numbers would be equivalent to the fiscal year 2012 supplementary budget, implemented in January 2013, just after Mr. Abe came into power. Shortly after the announcement of this big fiscal boost, the Bank of Japan (BoJ) revealed its “quantitative and qualitative easing (QQE)” strategy, an aggressive expansion of the central bank’s balance sheet through government bond purchases. While it’s difficult to see a blockbuster BoJ announcement in the near term, it seems likely that the BoJ will reconfirm its commitment to the bond-purchase program. By buying 80 trillion yen of Japanese government bonds (JGBs) per annum—far in excess of the government’s net funding requirement—the BoJ is, in effect, already financing government spending. One might be tempted to call this “helicopter money,” or central-bank-financed fiscal stimulus. And with the latest anticipated fiscal expansion inevitably funded by the BoJ’s bond purchases, it will become increasingly difficult to avoid that moniker.
How will this pan out? Will it be another step towards an Abenomics success, or a big leap into inflationary oblivion? While recent Japanese inflation data have ebbed away a bit after brief gains, we think that these policy actions are starting to raise inflation flags. The combination of near-full employment and a stimulus package that’s likely to find its way into final spending (unlike the BoJ’s asset purchases), against a backdrop in which the central bank is actively attempting to untether inflation expectations, sounds like a recipe for rising inflation. It may not be today’s story, but it’s a rising probability for 2017.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.