Japan Launches Stimulus Program

January 11th, 2013
in econ_news, syndication

Econintersect:  An aggressive economic stimulus plan was approved Friday (11 January 2013) by the cabinet of newly elected Japanese prime minister Shinzo breakingnews130pxAbe.  The prime minister said that the new policy, which will authorize the spending of ¥10.3 trillion ($116 billion), is directed toward stimulating economic growth.  The government expects that the package will boost GDP by 2% and add 600,000 new jobs.

On a per capita basis, the package is equivalent to a stimulus program in the U.S. of $282 billion and 1.4 million jobs.

Follow up:

The cost per new job is approximately $200,000 before adjustment for any increased tax revenues that result.  Of course, if the each new job continues for an average of five years the accumulated increased tax revenues would constitute a significant fraction of the stimulus expenditure.

Using the present average value of Japanese annual household income of ¥6 million ($68,000), 600,000 jobs would use about 1/3 of the package (¥3.6 trillion) for salaries and wages.  At an effective tax rate of 13%, the estimated increased personal tax revenue per year would be ¥468 billion, without applying any multipliers for further spending throughour the economy.  After five years almost 2/3 of the ¥3.6 trillion would be recovered.

With Japan's relatively high corporate tax rate (between 35% and 38%) it is likely that a significant fraction of the other 2/3 of the stimulus might be recovered. If Japan's $5.7 trillion (¥500 trillion) GDP is boosted by 2% as projected, that is ¥10 trillion increase.  If half of the GDP increase resulted in taxable corporate income, then tax revenue would be increased by ¥1.8 trillion per year, or ¥9 trillion over five years.

The key to all these estimates is, of course, the assumption that the stimulus money will be effective in establishing growth so the multi-year follow-on occurs.  But if the increases projected by the government do persist for several years the stimulus expense could well be more than offset by increased tax revenues.

The package is almost equally divided between additional resources for rebuilding after the March 2011 earthquake and tsunami, social security (especially pensions, healthcare and education) and support for improvements to aid the private business sector.  Here is the summary from the Financial Times:

Mr Abe said that his plan to revitalise Japan’s economy would be based on “the three arrows of a bold monetary policy, flexible fiscal policy and a growth strategy to stimulate private investment.”

Of the Y10.3tn in fresh government spending, Y3.8tn will go towards rebuilding the Tohoku region and strengthening disaster prevention, Y3.1tn will be allocated for wealth creation, through measures to improve the competitiveness of Japanese industry and stimulate innovation and Y3.1tn will go towards social security such as healthcare and education as well and regional revitalisation, Mr Abe said.

Spending will be largest for measures to stimulate private investment, which will receive Y1.8tn in fresh funds, and measures to help local economies access capital, which will cost the government an additional Y1.4tn.

John Lounsbury


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