Abe not alone in emphasising fiscal stimulus

Tokyo

SHINZO Abe, economics guru. The description seems unlikely at first sight but with his recent emphasis on the need for fiscal stimulus in the world's most advanced economies, the Japanese prime minister has emerged as something of an intellectual figure in the sphere of economics

This is because, some say, he has proved to be a "good listener", at least when it comes to taking counsel from international economic gurus both in Japan and overseas. Some of these Nobel prize-winning economists have been telling him of late of the virtues of fiscal stimulus.

It is easy to dismiss this as self-serving on the part of Mr Abe who faces an upper house parliamentary election next month which, it is argued, he badly needs to win by "buying" voter support with government handouts. And it is true that monetary policy seems to have run its course in Japan.

But there is more to it than that. It so happens that there is a close parallel between what Mr Abe has been saying of late on the subject of fiscal stimulus and the wisdom that is emanating from the glitterati of the economic world, including people such as Joseph Stiglitz and Paul Krugman.

It so happens too that one of the people Mr Abe invited to address Group of Seven (G-7) political leaders at the recent Japan-hosted summit in Ise-Shima was Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development (OECD) - and the OECD's recent calls for fiscal stimulus resonate closely with those from the Japanese leader.

Mr Abe has his own domestic advisers helping shape the seemingly ever-changing profile of Abenomics. High on the list are former Finance Ministry bureaucrat Etsuro Honda and Yale University emeritus professor Koichi Hamada. But they seem as committed to monetary as fiscal stimulus.

Japan's leader seems to have shifted more onto a fiscal tack, however, and the latest OECD Economic Outlook report said "reliance on monetary policy alone has failed to deliver satisfactory growth and inflation". Further monetary easing could be "ineffective or counterproductive".

Global growth has slowed to around 3 per cent a year and in order to "break out of this low global economic growth . . . comprehensive national policies, incorporating more proactive fiscal prioritisation in combination with accommodative monetary policies" are required, the report said.

COLLECTIVE ACTION

The emphasis on fiscal policy was no doubt music to Mr Abe's ears since that was precisely what he had been arguing to his G-7 counterparts. He promptly went ahead and delayed a controversial plan to hike Japan's national sales tax, while also promising fresh government spending in the country.

Many countries have room for fiscal expansion to strengthen activity, the OECD suggested. They should "follow the lead of China and Canada" and make long-term investments in infrastructure and other areas such as spending on boosting productivity while interest rates are low. Collective action to raise public investment in projects with high growth impact would boost demand with little threat to fiscal health. This again is what Mr Abe has been advocating, suggesting that Abenomics may have gained a new lease of life as a universal remedy.

The media were not privy to precisely what was said at the Ise-Shima dialogue between key economists and G-7 leaders. But they would no doubt have had access to both academic wisdom and data available from the OECD and the International Monetary Fund, whose managing director Christine Lagarde was also present.

"Eight years after the global economic crisis" in 2008, the OECD report said, economic recovery around the world remains "disappointingly weak". Global GDP (gross domestic product) growth this year will remain unchanged from 2015 at a modest 3 per cent and improve only slightly next year, it predicted.

The IMF has called this low-growth scenario the "new normal" and has said (as has the World Bank) that such low growth is not enough to continue lifting the world's poor out of poverty or improve the lot of increasingly disadvantaged middle classes in advanced and emerging economies alike.

"Many emerging economies have lost momentum, with sharp downturns in some, especially commodity producers," the OECD noted. Meanwhile, "the upturn in advanced economies remains modest with growth held back by slow wage gains and subdued investment".

Also, "financial instability risks persist. Emerging markets have high private debt burdens and remain vulnerable to capital outflows and weaker than expected growth", not to mention threats posed by floods of refugees and problems with keeping the European Union intact.

All this, the OECD added, "culminates in growth rates (that are) much weaker than anticipated a few years ago, and well below pre-crisis norms. Such prolonged slow growth has resulted in extended unemployment, foregone investment, low trade growth and damaged productivity".

THE CHINA FACTOR

Numerous other diagnoses by public and private-sector economists and officials have emphasised the fact that the global economy (with a few exceptions such as current star performer India) is stuck in a rut with adverse demographic trends compounding the impact of low productivity.

Meanwhile, Mr Abe seems to have perceived (with a little help from the likes of the OECD) that the "China threat" is greater than generally perceived, not just because of the slowdown in the world's second-largest economy per se but because of what it means for Japan and the rest of Asia.

What the OECD calls "rebalancing and on-shoring in China" (bringing more stages of manufacturing production into China rather than relying on outsourcing and value chains) has "contributed to weak trade growth". Hence, as Mr Abe says, the need for Japan to stimulate demand in its own domestic economy via fiscal and other means.