Fiscal Stimulus May Not Assure Sustainable Recovery in Japan

In the second quarter of 2009, Japan recorded its first expansion after six quarters of negative growth. But can we talk seriously about a sustainable recovery with the Japanese economy being boosted primarily by a series of stimulus packages engineered by the government?

Indeed, in Q2 Japan recorded a 2.3% growth after an 11.7% decline in the first three months of 2009. However, as data shows this expansion was mostly boosted by government pumping money into the economy. For example, public fixed investments accelerated 36% due to extensive public works. Also, personal consumption went up 3% as subsidies for purchasing energy saving electrical goods and environmentally friendly autos boosted the sale. Looking further, there is more help to come from the Japanese government. The Democratic Party of Japan won a big majority in recent elections. Among other political measures, the DPJ plans to implement fiscal stimulus measures this time focused only on increasing household disposable income. Indeed, according to the DPJ manifesto, we should expect a new wave of emergency economic measures worth ¥14.1 trillion (2.8% of GDP). The party is also promising an annual $3,300 stipend for families for each of the children, free education, and elimination of highway tolls and expansion of unemployment insurance. It also pledges support for farmers and revitalization of farming and fishing through individual income subsidies.

But, can really fiscal measures assure sustainable recovery in Japan? At Trading Economics, we have doubts about it. We can’t forget that Japan has export oriented economy and exports not domestic consumption has been the main engine of growth in the past six years. Indeed, last month some economist pointed that second quarter recovery came also from better than expected trade data. Indeed, the growth contribution from trade surplus was somehow significant because of weak imports more than a pickup in exports. And, although exports (still around two thirds of last year levels) declined at the slowest pace in the second quarter, it was mostly due to global stimulus measures and renewed inventory buildup. Looking forward, at Trading Economics we expect Japanese economic growth to stay below trend with sluggish spending around the world expected to continue and stimulus packages sooner or later drying up.

Anna Fedec,
9/17/2009 2:14:30 PM