Shinzo Abe has great expectations for his stimulus package. Japan’s new prime minister thinks his Y10.3tn ($116bn) fiscal boost will provide a “rocket-start” to the economy, leading to fast economic growth and rapid job creation. So far, investors appear to agree with him: when the plan was unveiled last Friday, the Nikkei index rose by 1.4 per cent.
Yet, such optimism is probably excessive. A Japanese government seeking to revive its ailing economy via a combination of public works and subsidies is hardly big news. There have been 14 stimulus packages since November 1999 and none of them has put the economy back on its feet. Nor was last week’s fiscal expansion too large. Mr Abe seems to be running to stand still, rather than sprinting for growth.
That said, the government is right to open its purse. The public sector is not excessively swollen: at about 40 per cent of national income, spending by the public sector in Japan is below the European average. Borrowing costs are low and, thanks to a domestically held and largely captive bond market, unlikely to increase in the near term. While the public deficit and debt should be cut, this should happen when the economy returns to sustained growth.