February 29, 2016 / 11:17 PM / in 3 years

Japan setting up panel to debate new spending: sources

TOKYO (Reuters) - Japanese Prime Minister Shinzo Abe will convene an advisory panel to consider an extra budget for the coming fiscal year, sources told Reuters, days after the Group of 20 nations urged more fiscal spending to support the ailing global economy.

Japan's Finance Minister Taro Aso attends the opening ceremony of the G20 finance ministers and central bank governors meeting in Shanghai, China February 26, 2016. REUTERS/Aly Song

Abe will announce the plan later on Tuesday, the sources said.

Financial market turmoil and economic contraction at the end of last year have increased pessimism about Japan’s domestic demand, but rising tax revenue and falling bond yields suggest it now has more leeway to spend.

Finance Minister Taro Aso told reporters on Feb. 23 that he would not rule out compiling a stimulus package for fiscal 2016/17, which starts from April.

“If there are changes in the economy, then it’s natural to respond with an extra budget,” said an official involved in fiscal policy, who told Reuters the government was seriously leaning toward more spending.

“Cash handouts for pensioners have only just started, but this could be an option,” the official said, referring to a policy that will start next month.

Timing was not yet clear on an extra package, he said, though ruling party heavyweight Toshihiro Nikai has said he suspected it was being prepared ahead of elections expected in July.

Abe advisor Masahiko Shibayama has also said the next package could include spending on childcare and elderly care to reduce the burden on the working population.

Economists are building extra spending into their forecasts.

“We are already factoring in an extra budget for money to be spent in fiscal 2017,” said Masamichi Adachi, senior economist at JP Morgan Securities.

“Nominal growth is good, and tax revenue is nominal, so the government should have enough money to spend.”


A spending boost could also offset the coming blow from a rise in sales tax to 10 percent from 8 percent in April 2017.

The government tried the same thing when it raised the tax to 8 percent from 5 percent in 2014, but its 5.5 trillion yen ($49 billion) stimulus package was not enough to stop a recession.

This time the size of the tax increase is smaller, and the government has already agreed to exempt food and other everyday goods, but politicians are worried.

Yoshihide Suga, the government’s top spokesman, said on Friday taxes should not be raised if it caused revenue to fall, suggesting a delay is possible.

A 2 percentage-point sales tax hike will cost consumers around 5 trillion yen, so the government needs to spend 5 to 10 trillion yen to keep consumption on track, economists say.

“The size of fiscal stimulus should be at least equally as large as last time, possibly larger, given the global situation,” said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.

Tax revenue is closely correlated with nominal gross domestic product growth, and on that measure Japan is set for a windfall, economists say.

Last calendar year, nominal GDP expanded at the fastest pace since 1994, when comparable data first became available. The finance ministry expects fiscal 2015/16 tax revenue to reach a 24-year high of around 56 trillion yen, more than their original estimate of 54.5 trillion yen.

Even if nominal growth slows, fiscal 2016/17 tax revenue could still top the government’s estimate of 57.6 trillion yen, economists say.

And the government could bring forward bond issuance, they say, as it can borrow at no cost, given the Bank of Japan’s (BOJ) negative interest rate policy.

Critics say Japan already has the world’s worst debt burden at twice the size of its economy and runs large budget deficits, so risks triggering a downgrade by credit rating agencies.

Fiscal doves argue that weakness in the world economy justifies it, and in any case bond markets are immune to ratings agencies while the BOJ is pumping out money through its quantitative easing program.

At a weekend summit the G20 sided with the doves by calling for more fiscal spending and less reliance on monetary policy to help the fragile global economy, which some investors say has reached its limit after years of quantitative easing and negative real interest rates.

BOJ Governor Haruhiko Kuroda has supported that position, saying each country has agreed to use all available policy tools.

Abe’s new advisory panel will meet about five times before Japan hosts a Group of Seven summit in late May, and Japan hopes its debate on an extra budget will encourage other countries to shift away from fiscal austerity, sources said.

“This may not influence Europe, but China, South Korea and other Asian countries could follow Japan’s spending approach,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

Additional reporting by Yoshifumi Takemoto and Takashi Umekawa; Editing by Will Waterman

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