Perspectives

The impact of fiscal stimulus is uncertain

st  
7
EcoPerspectives // 1 quarter 2020  
economic-research.bnpparibas.com  
Japan  
The impact of fiscal stimulus is uncertain  
In December 2019, the Japanese authorities decided to launch a major fiscal stimulus for the years ahead. A large part of the  
programme will target disaster prevention after the country was hit by a series of natural disasters recently. The stimulus will also  
limit the negative impact of last October’s VAT hike, which probably strained private consumption in the year-end period. Buoyed in  
part by early purchases ahead of the VAT hike, household spending continued at a dynamic pace in Q2 and Q3 2019. The export  
sector, in contrast, was hard hit by the sluggish global environment. In 2020, public investment is expected to partially offset weak  
private consumption.  
Given the lack of monetary policy leeway a situation that is  
unlikely to change by 2021  Japan has resorted to fiscal policy  
1
- Growth and inflation  
GDP Growth (%)  
Inflation (%)  
again. It has launched an ambitious fiscal stimulus plan equivalent  
1
Forecast  
to about 2% of GDP , including infrastructure investments to rebuild  
Forecast  
2.2  
and protect against natural disasters. Yet the economic impact of  
this stimulus is still uncertain.  
Sluggish growth in 2020  
1.0  
1.0  
0
.7  
0
.6  
0
.5  
0.5  
Although domestic demand  and private demand in particular –  
was robust in the first 3 quarters of 2019, it is expected to slow  
sharply in Q4, which would erode momentum in 2020. Household  
spending are likely to be curtailed by October’s VAT hike. Typhoon  
Hagibis in October would curb corporate investment. Manufacturing  
output and exports were both severely weakened last year and are  
unlikely to rebound strongly in 2020. The most recent economic  
data is still looking downbeat: since May, the Purchasing Managers  
Index (PMI) in the manufacturing sector has held below 50, the  
threshold that separates expansion from contraction (48.4 in  
December). Moreover, the Bank of Japan’s Tankan index for the  
manufacturing sector still hasn’t picked up (-4 points in Q4 2019).  
The non-manufacturing sector also dipped slightly. Two factors to  
follow closely are China’s economic growth, given its heavy  
weighting in Japanese trade, and the outcome of negotiations to halt  
the US-China trade tensions.  
0.3  
0
.3  
0
.2  
1
7
18  
19  
20  
21  
17  
18  
19  
20  
21  
Source: National accounts, BNP Paribas  
2-Diffusion index (% points)  
-
--- Labour Production capacity  
20  
10  
0
-
-
-
-
10  
20  
30  
40  
All in all, Japanese economic activity should slow to 0.2% in 2020  
(
2
down from 1% in 2019) before converging towards its potential in  
021. Without a significant acceleration in activity, inflationary  
pressures are likely to remain weak.  
2
010 11  
12  
13  
14  
15  
16  
17  
18  
19  
Source: Bank of Japan  
Note: The diffusion index shows the number of companies signalling surplus capacity  
(or labour) minus those reporting a shortage of capacity (or labour).  
Major fiscal stimulus, but its impact is hard to  
evaluate  
2
The fiscal stimulus package adopted by the Japanese authorities  
should limit the negative impact of the VAT increase. Yet, despite its  
size and apparently favourable structure (public investment will have  
a big impact on growth in the first year), it risks having only a mild  
impact on activity.  
seem to be very efficient) . Moreover, certain investment projects  
may have to be postponed due to labour shortages (see chart 2).  
Indeed, it is hard to estimate the impact of a fiscal stimulus (in  
Japan, it is difficult to distinguish between trends and cyclical  
patterns), and the related fiscal multipliers are relatively less stable  
in Japan (the transmission channels for cyclical policies do not  
1
2
Part of the budget programme that was presented did not directly concern  
A. Auerbach and Y. Gorodnichenko, Fiscal multipliers in Japan, NBER,  
public demand.  
February 2014  
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