Japan looks to increase role of fiscal policy in next budget

[TOKYO] Japanese Prime Minister Shinzo Abe's government is pushing for a greater role for fiscal policy next year, according to draft guidelines for the 2017 budget seen by Bloomberg.

The government handed over the document for Japan's initial budget for the fiscal year starting in April to the ruling Liberal Democratic Party on Monday, and it advocates more use of fiscal policy to help the economy in coordination with loose monetary policy.

Japan is among countries around the world that are turning to fiscal spending to stoke sputtering economies, some after years of extraordinary monetary easing failed to achieve strong, sustainable growth. In the US, President-elect Donald Trump has promised to spend US$550 billion on infrastructure and to cut taxes.

There is particular interest in fiscal policy in supporting growth in Japan. Some doubt the Bank of Japan will be able to maintain its aggressive monetary easing program. The BOJ recently shifted its policy regime to one better-suited for long-term sustainability, but some economists say the new framework provides cover for a "stealth tapering" of its asset purchases.

The budget document does not mention spending levels or targets, but it lists principles that should guide next year's budget. It points out the importance of investing in elder care, child care and research and development. It also notes improvements in income and employment conditions, saying policies are needed to ensure that progress in those areas is not undone.

The cabinet is set to approve the document by the end of next week, according to a person familiar with the plan.

Fiscal spending was the "second arrow" of Mr Abe's growth program, Abenomics, but its implementation has been sporadic. In August, Mr Abe proposed a 28 trillion yen (S$360 billion) supplementary stimulus package that was approved by parliament last month, but only about a quarter of that amount was new spending.

Japan's fiscal stimulus is often packaged in supplementary budgets.

It's better to expand the initial budget for policies that require sustained spending, such as investing in elder care, child care and research and development, said Koya Miyamae, senior economist at SMBC Nikko Securities.

"It's easier to apportion funds to things related to structural reforms in the initial budget," he said.

BLOOMBERG