On November 21, the Cabinet approved a comprehensive economic package. The expenditure increase in the supplementary budget is expected to reach 17.7 trillion yen, with the “mamizu” (actual fiscal stimulus), including tax cuts, totaling approximately 21.3 trillion yen. This is an upward revision of about 4 trillion yen compared to the figures of 14 trillion and 17 trillion yen reported by the Nikkei and Yomiuri on the 17th. While an outsider like myself cannot know the exact nature of those earlier reported figures, it is likely that the Nikkei and Yomiuri simply ran with a leak from the austerity faction intended to sway public opinion.
While this amount is not at a level that leaves me entirely satisfied, one can say that Prime Minister Takaichi fought well in an environment where the austerity faction still holds significant sway. Under previous administrations, we undoubtedly would not have seen figures this high. This is because of the fixation on the primary balance (PB) surplus target. As I have pointed out before, even Thailand—which ran a surplus in its actual fiscal balance, the heart of the matter—fell into a currency crisis in 1997. It is clear that achieving a PB surplus is meaningless. Furthermore, as I stated previously, the specific content of the spending or tax cuts is, to put it extreme, irrelevant.
Regarding that primary balance, PM Takaichi already declared in the Lower House Budget Committee on November 7 that the government would stop the annual practice of verifying the status of achieving the surplus target. It is only natural that economic growth takes priority over a meaningless primary balance. In an article on November 15, Hideo Tamura, special staff writer for the Sankei Shimbun, argued that we should “not just loosen, but break away from” the PB surplus target. He is exactly right. While it may be difficult for the Prime Minister to say so openly due to potential badgering from the austerity faction, I believe this is her true conviction as well.
According to a Bloomberg report on November 19, Takeo Kataoka—a member of the Growth Strategy Council and former BOJ Board Member—asserted that, assuming a large-scale supplementary budget of around 20 trillion yen, “depending on the situation, an environment could be in place for the BOJ to raise interest rates as early as March.” This is what I call a “sane argument for rate hikes” (for my previous posts on “insane” arguments, see here and here). As I have noted before, low interest rates under PM Takaichi will only be a temporary phase; once economic prospects improve, I anticipate that interest rates will actually rise higher than they would have if the austerity faction had remained in power.
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