Research & Investment Strategy

Japan’s COVID-19 response: Crisis met with strong economic package, but is it enough?

Key points

  • Japan’s government has approved a second package of economic measures, totalling some ¥117.1tn (21.5% of GDP), roughly the same as the previous boost adopted in April. This brings the total package to 43% of GDP.
  • The headline includes significant contributions from private sector projects and financial assistance via government-affiliated financial institutions. It is not obvious how much these facilities will be used, and they do not constitute direct fiscal spending. Excluding these items, additional spending is a smaller ¥57.6tn, or 10.6% of GDP, boosting the deficit by 11 percentage points (ppt) to 14% in 2020
  • Overall, net direct stimulus would be ¥30.7tn (5.5% of GDP), after we allow for other financial support and budget reserves. Historic estimates of fiscal multipliers suggest an impact of 2.6 percentage points of GDP
  • The Bank of Japan has strengthened its monetary policy to support the government’s action. It is likely to use its Yield Curve Control policy extensively, reducing the risks of rising financing costs. In parallel, it has promoted targeted measures to ensure smooth credit provisions throughout the banking sector.

The COVID-19 pandemic has resulted in an unprecedented response from governments and central banks worldwide. In previous papers we have considered the steps the US has taken with fiscal and monetary stimulus to alleviate the shock to its economy[1] and considered the impact in China[2].

In this piece, we focus on the different measures promoted by the Japanese government and Bank of Japan (BoJ).

[1] Page, D., “COVID-19 Update – US policy response”, AXA IM Macro Research, 3 June 2020

[2] Yao, A., “China: Fuelling recovery with an extra policy kick”, AXA IM Macro Research, 9 June 2020.

 

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