Japan’s fiscal arrow ought to target young and old

June 6, 2016

(The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.)

Shinzo Abe is preparing a new assault on deflation. After postponing a hike in the country’s consumption tax, the Japanese Prime Minister is limbering up to launch a fiscal stimulus which could be worth between 5 trillion and 10 trillion yen ($47 to $93 billion). Using government money to expand the workforce and slow the aging of Japanese society would mark a welcome combination of two of Abe’s three arrows of reform.

There’s no shortage of ideas for spending extra cash. Infrastructure projects are one option: Abe said last week the government would bring forward plans for a high-speed train between Tokyo and Osaka that uses magnetic levitation. Handing out vouchers directly to citizens is another possibility. But the best suggestion is to use the fiscal stimulus to address Japan’s demographic challenges.

The list of worthy causes is long. Vouchers for private nurseries would make life easier for working mothers, helping to increase the number of women in the workplace from the current level of just 49 percent. Higher pay for elderly care workers would relieve the burden on families looking after ageing relatives. Meanwhile, additional healthcare insurance for employees over 60 would encourage older people to keep working. Increased financial support for couples who have second and third children might help to slow the shrinking of Japan’s population, but is far from a sure bet: the country’s fertility rate of 1.4 is already higher than Korea and Hong Kong.

Though fiscal hawks oppose a stimulus, austerity was overdone. Between March 2014 and March 2015: Japan’s fiscal deficit as a proportion of nominal GDP narrowed from 7.7 percent to 5.6 percent, according to Morgan Stanley. That’s the steepest drop in almost two decades.

Some observers are predicting Abe could launch his latest fiscal boost at the same time as the Bank of Japan, which meets on June 16, unveils a fresh dose of monetary stimulus. Such a co-ordinated assault would have the benefit of coming ahead of elections to Japan’s upper house on July 10, notes HSBC. If the fiscal boost was targeted at solving some of Japan’s severe structural problems, all of Abe’s arrows would be soaring overhead at the same time.

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