Japan Brief / FPCJ, No. 0858
　　　　
September 1, 2008


Government Unveils 11.7 Trillion yen Emergency Stimulus Package to Reassure People

An economic stimulus package worth 11.7 trillion yen was announced by the government on August 29 in an attempt to cope with growing signs of economic slowdown in the midst of rising inflation and sagging demand, and, politically, to boost the low-hovering approval ratings of the government of Prime Minister Yasuo Fukuda. Largely consisting of makeshift measures to help industries affected by soaring prices of oil and other commodities, as well as consumers, the package is seen as geared toward winning votes in a general election that could be called any time within a year, but lacking impact to strengthen the economy over a longer term.

Termed “emergency comprehensive measures.” the package is officially aimed at allaying people’s apprehension about life at present and in the future, transforming society into a more sustainable one, and strengthening the growth potential of the economy. It consists of: enlargement of credit guarantee for smaller enterprises, lowering of tolls on expressways, measures to promote solar power generation for homes, reinforcement of the quake-resistance structure of public school buildings, reducing the health insurance premium of the aged, tax breaks for housing loan. Of the total 11.7 trillion yen, cash spending will amount to 2 trillion yen, which mostly will be appropriated in a supplementary budget for fiscal 2008.

With the popularity of the Fukuda government visibly low and an impending general election in mind, the ruling coalition was keen to put together a package to meet the immediate economic concerns of businesses and consumers that were hit, among other things, by rising prices. But it was criticized as failing to address more fundamental, structural issues like deregulation to strengthen the economy. It was moreover seen as threatening the government’s pledge to stick to spending discipline to restore fiscal balance, a hallmark of the Liberal Democratic Party’s platform since the Koizumi government.

What has added to the “handout policy” criticism is a flat rate income tax cut to be implemented within the current fiscal year, unabashedly pushed by New Komeito, the junior coalition partner, over Liberal Democrats’ opposition. While its details including the exact timing and size are yet to be worked out, the tax cut, to be bestowed irrespective of the level of income, is considered to benefit those in lower income brackets. However, its ability to stimulate the economy is held in question, even though it represents a drain on revenues which must be made up for by other sources of income or spending cuts still unspecified.

All together, the stimulus package could inevitably necessitate the issuance of additional bonds. Prime Minister Fukuda hates to see that happen because it will be a visible breach of the principle of fiscal discipline that has been pursued in the past several years toward the goal of achieving equilibrium in the “primary balance” in fiscal 2011. (The primary balance is the balance between revenues other than bond issues and expenditures excluding debt servicing costs.)

That his party, such a goal notwithstanding, yielded to the New Komeito’s demand for a flat sum tax cut represented its precarious position, crucially in need of the New Komeito’s support to keep a critical two-thirds majority in the lower house. The New Komeito in turn is desperate to ensure the votes of members of Sokagakkai, the Buddhist group that backs it.

Media Commentaries
Major newspapers’ editorial comments criticized the stimulus package as undisciplined fiscal handouts aimed at populist gains at the expense of fiscal health and achievement of long-term economic strength. They were unanimous in strong opposition to a flat rate tax cut. (Newspapers are given in alphabetical order; editorials were dated August 30, except Mainichi dated August 31.)

【Economic package must allay public's anxiety】(Yomiuri Shimbun)
“It was inappropriate that the government and ruling parties decided to implement a fixed reduction in income and residence taxes this fiscal year. A flat tax break is a typical handout measure--taxes are cut regardless of individuals' income levels.” “If the tax cuts are implemented through additional issuance of government bonds at a time when there is little prospect of securing sufficient revenue sources to cover growing social security expenses, people may feel concerned rather than relieved. The planned fixed reduction of the taxes should therefore be scrapped.”

【Flat rate tax cut: Resumption of handout?】 (Asahi Shimbun)
“Japan’s current fiscal shape is worst among advanced countries. Even though more budget is being required for pension and medical services, nursing care, education and official development assistance, adequate appropriations are not being provided. The reason for this is that economic packages totaling 130 trillion yen implemented by governments during the post-bubble decade squandered resources in tax cuts and public works investment funded by rampant bond issues.” “Helping low- income people needs to be considered, but we cannot afford to do that through such means as a fixed sum income tax cut.”

【Don’t be fooled by populist gimmicks】(Mainichi Shimbun)
“Under the three goals of allaying citizens’ anxiety, acceleration of reform toward a sustainable society, and transition to a new price system and strengthening of growth capability, the emergency package represents a collection of unfocused measures, with its size in terms of projects swelling to 11.5 trillion yen. This is exactly what a handout policy is all about. On top this is coming a flat rate tax cut, which runs counter to a fundamental tax reform under consideration. Let’s not be fooled by these populist gimmicks.”

【Economic package is focused on an immediate easing of burden】(The Nikkei)
“As a whole, the measures unveiled this time appear to be emphasizing an easing of pain through temporary reduction of burden. Little long-term effect can be expected from them to promote structural reform and strengthen the economy. They appear to have given priority to surviving an approaching election.” “It is also important to build up infrastructure to strengthen growth capability, including deregulation, and change the Japanese economy into a stronger structure.”

【Budget formulation: Is fiscal rebuilding faltering?】(Sankei Shimbun)
“To begin with, the comprehensive economic measures should be intended as a structural reform policy to move the economic society to a new price system of raw materials like crude oil, prices of which are assumed to stay high. But the steps to be taken in the package hardly seem to be in line with that objective. Financial assistance to transporters aimed at reducing fuel costs or expanded credit guarantee for smaller enterprises is not only just stopgap in nature, but also could cause moral hazard. Inclusive of projects with impact far from economic stimulation, such as quake-resistance reinforcement of school buildings, the economic package has swelled to more than 11 trillion yen in terms of the size of projects.” “We want the prime minister to live up to fiscal discipline for Japan, not for elections.”

(Copyright 2008 Foreign Press Center / Japan)