Japan likely to spend $90 billion year-on-year for 5 years on fiscal stimulus

Satoshi Fujii, an adviser to Japanese Prime Minister Shinzo Abe sees the fiscal stimulus measure as the most likely path Japan will have to take in order to maintain its growth trajectory.

On Thursday, an adviser to Japanese Prime Minister Shinzo Abe advised, Japan should spend $90 billion (10 trillion yen) year on year for the next 5 years on fiscal stimulus so as to offset a decline in consumption that is expected once the sales tax is increased to 10%, up from 8%.

In order to pay for the increase in healthcare costs, Japan is set to increase sales tax nationwide in October 2019.

The hike is expected to negatively impact consumer sentiments, thus Tokyo needs to spend more to sustain and maintain its growth momentum, said Satoshi Fujii, an adviser to Abe.

“We have done psychological studies showing a tax increase to 10 percent will cause a big decline in consumers’ willingness to make purchases,” said Fujii, citing research at Kyoto University where he is a professor. “This impact will not be brief. It will last a long time.”

He went on to add, the government will have to spend more on education, mid-career training and take steps to improve corporate productivity.

Given its rapidly ageing economy, Japan needs every bit of extra revenues to pay for the ballooning healthcare. Given its price-sensitive citizens, even a slight increase in tax rates could have a deep and long-lasting consequences for its economy.

While Fujii’s comments underscores the fact that the government will have to rely on more fiscal stimulus to keep the economy on track, at least on theory, however it could give the impression that fiscal discipline is slipping.

The government should increase spending on disaster prevention from flooding and earthquakes in Western Japan, said Fujii.

These comments come in the wake of a powerful earthquake paralyzing Hokkaido early on Thursday because it triggered landslides and power outages.

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