Japan Needs Fiscal Stimulus to End Deflation, Abe Adviser Says

(Bloomberg) -- Japan needs large fiscal stimulus packages through 2018 to escape from deflation, according to an adviser to Japanese Prime Minister Shinzo Abe.

The government should add 20 trillion yen ($198 billion) in fiscal stimulus this year to achieve the 2 percent inflation target in fiscal 2017, said Satoshi Fujii. To “completely end deflation,” about 37 trillion yen in stimulus is needed, the Kyoto University professor said in an interview on Wednesday.

More than three years after Abe came to power pledging to end deflation and revive growth in Japan, inflation is elusive and the economy has oscillated between growth and contraction. Fujii’s comments indicate that after Sunday’s upper-house election, the government is willing to increase spending, even as Japan carries the world’s largest debt burden.

The stimulus package should be 20 trillion yen this fiscal year, 12 to 13 trillion yen next year and 5 to 6 trillion yen in 2018, Fujii said, without giving details on how this would be financed or how much of the package would be new spending. Investments could include a bullet train on the northern island of Hokkaido, public safety infrastructure, and urban planning projects. Expanding child care facilities and revitalizing regional economies are also important, he said.

Negative rates

In conditions of deflation, fiscal policy is “exceptionally effective,” he said. Fujii praised the Bank of Japan’s negative interest rate policy introduced in January as strongly pushing investment, and added that if government policy makers didn’t increase investment in public works, the effectiveness of negative rates in fighting deflation would be hampered.

It would be a mistake for the BOJ to tighten monetary policy at its next meeting July 28-29, Fujii said. “If the BOJ turns contractionary it would have a big impact. I certainly hope that does not happen,” he said. The central bank currently sees inflation reaching its 2 percent target sometime in fiscal 2017, which begins in April next year.

On Brexit, Fujii was not overly concerned. “Without a doubt risks have increased, but it won’t crash the global economy,” he said.

To contact the reporters on this story: Connor Cislo in Tokyo at ccislo@bloomberg.net, Maiko Takahashi in Tokyo at mtakahashi61@bloomberg.net. To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, James Mayger, Jodi Schneider