Double Your Money: More Than Meets the Eye, Says Reuters

By Takaya Yamaguchi and Linda Sieg

TOKYO – Japan is preparing a substantial spending package estimated at around $190 billion to stimulate its economy, nearly double the initial figures considered. However, a closer analysis reveals that the actual public expenditure may be significantly lower than suggested by this figure.

Following a recent electoral victory, Prime Minister Shinzo Abe directed his government last week to develop a stimulus plan aimed at revitalizing an economy hindered by sluggish consumption and investment, despite three years of his "Abenomics" strategy, which emphasizes ultra-loose monetary policy and spending alongside promised reforms.

The forthcoming package is projected to have a reported total of at least 20 trillion yen. Yet, despite this impressive headline figure—which amounts to over 4 percent of the nation’s GDP—real government investment focused on boosting economic growth is likely to align with or even be less than previous predictions.

"It appears to be more of a paper tiger," commented Kentaro Sugiyama, a senior economist at Nomura Securities.

Approximately half of the nominal 20 trillion yen is expected to derive from direct spending by both national and local governments, with allocations of about 3 trillion yen and 6 trillion yen respectively. The remaining amount is anticipated to come from private sector firms receiving government subsidies and loans from quasi-government financial institutions.

Discussions within Abe’s ruling coalition may lead to an expansion of the package before its official approval on August 2. Jesper Koll, CEO of WisdomTree Japan, noted, "The intricate details often remain the same, indicating real fiscal stimulation might range from 2.5 trillion to 3.5 trillion yen."

Should the government guarantee loans under the Fiscal Investment and Loan Programme (FILP), these would be funded through government bonds and must be repaid out of the profits from the borrowing companies. Importantly, these types of loans are not accounted for in the budget and do not technically increase Japan’s already substantial debt, which is more than twice the size of the economy.

Throughout the years, governments have a history of inflating the headline numbers for their stimulus initiatives, giving rise to a specific term that describes the genuine spending portion: "mamizu," meaning "fresh water." Hidenori Suezawa, a fiscal and markets analyst at SMBC Nikko Securities, stated, "The 20 trillion yen figure loses significance without knowing the size of the ‘mamizu’ element."

As the government began shaping the package in response to a strengthening yen that threatened exports and growing global economic concerns, there was apparent pressure to present a more substantial figure, according to senior economist Hiroshi Shiraishi. "While there’s potential for further increase, the reality is they are unlikely to issue deficit-financing bonds,” he explained. “This essentially indicates that significant increases in handouts to households are not expected."

Additionally, the spending is likely to be allocated over several years, diminishing its immediate impact, and skepticism remains regarding the extent of increased private investment, particularly given the already favorable borrowing conditions.

Much of the spending appears to be earmarked for infrastructure projects, including enhancements to ports and expediting the construction of a high-speed "maglev" train line connecting Tokyo and Osaka. An LDP lawmaker suggested that the package may include a 3 trillion yen FILP loan for the maglev initiative over a three-year period.

Analysts are questioning the long-term growth implications of this stimulus. Suezawa emphasized that without policies aimed at addressing an aging and declining population and the challenges of globalization, the effectiveness of such measures could be limited and potentially worsen public finances.