Q. Is Japan’s pending 15-month anything to write home about?
A. The budget is aimed at bolstering GDP growth through productivity enhancement, in addition to the shorter-term goal of disaster recovery. It is set to be compiled by the end of the year, and is expected to total around ¥5T, or 0.9% of GDP. We reckon around 0.1 percentage points of that will go to the supplementary budget. The usual suspects, such as transport, likely will receive a boost in spending, while infrastructure will also be amped up to help mitigate the impact of natural disasters.
More broadly, this probably marks a turning point for Japan, back to its pre-Abenomics state. We expect a re-expanded government deficit, as well as slower growth and lower inflation. In fact, the private sector's financial surplus—the primary cause of large Japanese fiscal deficits—already has modestly re-expanded into 2017. This time around, households were the behind the wheel, thanks to rising incomes derived from the tight labour market and also from dividends. But the corporate surplus likely will now rebuild too. The expansion has to be offset elsewhere in the economy, or by foreigners, in the form of a larger current account surplus. In the current global climate, the scope to export savings abroad is limited.
Since the financial crisis, China's massive levering-up has given the world false hope over the prospects for global trade, with its stimulus-driven 2017 recovery likely a last gasp. But Chinese GDP growth will itself become more reliant on foreign demand, and will slow in any case. That leaves less room for others, such as Japan, to benefit from external markets. At the same time, it will be difficult to put the protectionism genie back in its bottle, now that it has been released, even if Mr. Trump is ousted in next year's elections. On the capital flows side, the lingering scars from the financial crisis limit foreign debt appetite. In Japanese policymaking, this false hope manifests itself as mistaking temporary demand inflation for lasting supply-side changes. To be sure, the current account surplus probably will take up some of the slack as Japan’s domestic demand deficiency re-exerts itself. But the government deficit also will have to re-expand.
Chief Asia Economist