Japan's Fight Against Fiscal Crises

Global economy, on the whole, has been stung by a series of catastrophic events. Especially, an event like the debt crisis in the euro zone countries that has led to a huge unemployment problem is hard to ignore. Not to forget the yuan devaluation that has created uproar in all the emerging market economies. There is also the aspect of innumerable sanctions on Russia by America and the European Union. Adding to the fire are the recurring problems in the OPEC nations alongside the political strife created by the ISIS in Syria, Iraq, Libya and Egypt. In all the above chaotic events, Japan too has had its share. 

Since long, this island country has been playing around with fiscal crisis. It all started with the asset price bubble in 1985 in the course of which the stock and real estate prices soared to stratospheric heights, driven by a speculative mania. Japan’s Nikkei stock average crashed in a spectacular fashion, causing its real estate sector to collapse, thereby throwing the country into a severe financial crisis and a long period of economic stagnation.

The nation was just about coping with this disaster, but before it could recover it got hit by the US subprime mortgage crisis in the summer of 2007. Japan’s real economy did not seem to be affected materially given its limited exposure to toxic assets. However, with the US’ and Europe’s flirtation with recession, global demand was affected, which acted as a negative factor for Japan’s exports. However, it still maintained positive growth in real gross domestic product and private fixed investment through the second quarter of 2008. Export growth was steady through the third quarter and it was only in the fourth quarter that the evidence of a severe economic contraction became apparent. 

The sharp appreciation of the yen was an additional blow to Japan’s export-oriented firms. The total value of exports which stood at Yen 7,360 billion in September 2008 declined moderately to Yen 6,915 billion in October 2008, and collapsed thereafter. This led to the downward movement of industrial and manufacturing production followed by a slump in retail sales. Both consumer confidence and spending took a hit – a serious factor given that it accounts for around 60 per cent of the country’s GDP. 

As a result, the Japanese government had to increase its spending so as to support the economy from deflating further. Japan welcomed the first ever quantitative easing programme. The BOJ aggressively bought Japanese government bonds so as to encourage inflation and get people to spend. In 2013, Prime Minister Shinzo Abe started off with a Yen 10.3 trillion stimulus package that included a mix of traditional infrastructure spending and vowed to buy Yen 7 trillion of government bonds each month using electronically created money.

This was a short-run measure to gain traction, which proved to be a long-awaited disaster. By mid-December of 2014, the BOJ had vacuumed up over Yen 300 trillion in assets. The spending was mostly focused on infrastructure construction that boosted investment in new housing. However, the low level of government spending on public works has resulted in a sharp decline in the construction industry since 2014. Thus, it hasn’t spurred the country’s inflation and GDP. Meanwhile, corporate earnings and business confidence in Japan improved, paving the way for more business investment opportunities. On the other hand, the pace at which the yen weakened turned out to be dreadful for small businesses, as a result of which they preferred to increase their margins by moving their factories offshore. This resulted in a sharp decline in industrial production and FDI.

Japan’s ageing population, which has decreasing birth rate and longer life span, has also become an issue for the economy. The number of retirees is on the rise as compared to young workers. This has led to a decline in savings owing to a surge in pensions and healthcare facilities. The government is therefore left with less monetary resources. Further, with a mounting debt load, even foreign investors are a bit apprehensive about investing in an already sluggish economy. Moreover, the increase in Japan’s sales tax in April 2014 from the previous 5 per cent to the current 8 per cent has not helped reduce the government’s debt burden. 

The earnings of the companies took a blow, which was in turn was passed on to the consumers. Core consumer prices increased, resulting in a sharp decline in consumer spending whereas retail sales were hit, thereby affecting the profits of the companies. A vicious circle was thus formed, which led to GDP contraction. Presently, advanced economies are growing at a moderate pace despite the slowdown in emerging economies such as China. However, external demand continues to lack momentum, which in turn is affecting Japan’s exports. Moreover, public investment is also trending downwards. Industrial production recently has been more or less flat. 

On the positive side is the expansion of the current account surplus, mainly due to a boost in tourism and falling crude prices that have pushed down the value of oil imports. In addition, the weaker yen is also helping the economy to increase its overseas’ income. Business investment along with private consumption and household spending has been on the rise, though moderately. However, this is not enough. With so many negative factors as part of its backlog, especially the ever-increasing government debt, Japan needs to pay close attention to its fiscal stimulus programme from a long-term perspective to revive its economy.

The author is Associate Director - Commodities & Currencies, Business Equity, Research & Advisory, Angel Broking (P) Ltd. The above article is the personal view of the author.