Kristian Rouz — The Japanese government is facing mounting calls to increase budget spending and, if possible, cut taxes, in order to boost economic growth, almost six years since the Bank of Japan (BOJ) introduced its unconventional monetary stimulus. One of the officials in charge of that programme, former deputy BOJ governor Kikuo Iwata, is now one of the main advocates for additional accommodation on the fiscal side.
In a statement, Iwata said the BOJ's policy of negative-to-zero interest rates (NIRP and ZIRP, respectively) has achieved limited success since it was first introduced back in 2013, supporting modest growth in inflation and economic expansion amid the global economic challenges of this decade.
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However, Iwata said, now might be the time to bolster monetary accommodation with loose fiscal policies, which could potentially help nudge Japan's inflation closer to the BOJ's 2-percent target, and improve overall economic growth and business activity in the country.
"Inflation won't hit 2 percent just with the BOJ continuing its current policy. The BOJ doesn't need to change its policy much now. What needs to change is fiscal policy," Iwata said.
The BOJ's base borrowing costs are currently set at minus 0.1 percent, meaning the cost of credit is especially cheap across the economy; however, the profitability of savings and bond yields are quite low. The credit-fuelled growth model, however, does not appear to promote sustainable economic expansion, and Japan's GDP growth has dipped into negative territory over the past few quarters, mostly due to overseas risks.
Iwata suggested that a fiscal stimulus programme could boost domestic consumption and growth in industries focusing on Japan's internal market, while also improving Japan's economic stability in the face of international trade risks.
However, most economists are sceptical, saying Japan's high level of national debt, currently roughly 253 percent of GDP, don't allow for a sound fiscal stimulus plan.
Iwata believes that stronger domestic consumption, in connexion with the recent hike in the sales tax, could make up for the potential loss of fiscal revenue.
"Fiscal and monetary policies need to work as one, so that more money is spent on fiscal measures and the total money going out to the economy increases as a result," the former BOJ official said. "That's the only remaining policy option."
The former central banker said tax breaks for young families and government investments in national projects could boost consumer spending, fuelling a rise in inflation. This, in turn, would allow for the normalisation of monetary policies amid a withdrawal from the questionable NIRP regime, which, some experts say, could hurt Japan's banking sector in the longer run.
"The BOJ's current policy does not have a mechanism to heighten inflation expectations. We need a mechanism where money flows out to the economy directly and permanently," Iwata said.
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Some economists believe the BOJ has used up all its stimulus power, and fiscal stimulus remains Japan's only remaining option to address possible economic challenges. Unless the government takes additional steps to spur inflation and normalise BOJ policies, Japan will remain vulnerable in the face of a global recession, should one occur.
"These adjustments (loose monetary policies), which if maintained too long, would only end up amplifying the dilemma by intensifying stress in the financial sector and/or undermining the bank's balance sheet," Prof. Sayuri Shirai of Keio University said. "In any case, it will no doubt be a very long time before the bank takes any clear steps toward normalisation."
Iwata said only a greater reliance on the domestic market could help the Japanese economy return to stable and sustainable growth.
"We're still on the cusp of emerging from deflation and that process is still fragile," he stressed. "Inflation needs to pick up via an expansion in demand."
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Whether or not Abe cabinet officials and top BOJ policymakers come up with a joint fiscal-monetary stimulus plan this year largely depends on how the US-Japan trade talks play out, some economists say. A possible expansion in Japanese exports to the US, along with an increase in imports, coupled with a possible devaluation of the yen, could spur Japan's inflation without fiscal accommodation.
However, if the terms of a future US-Japanese trade deal aren't quite as favourable for Japan, Iwata's suggestions are seen as likely to gain traction among policymakers in Tokyo.