Japan's fiscal measures to counter Covid-19 are very large...

Since the pandemic began, the Japanese government has delivered two supplementary budgets, which add up ¥58 trillion, or 11% of GDP. On November 10th Prime Minister Suga officially instructed his cabinet members to form the third supplementary budget, which is likely to be announced mid-December and passed by the Diet early next year. Based on remarks from executive members of the ruling parties, the size could be more than ¥15 trillion (2.8% of GDP). Accordingly, the size of total expenditures of the central government's general account and new government bond issuances (i.e., fiscal deficits) could surge to a record high in FY2021. Major expenditures have been cash handouts to both households and corporates as well as support for corporate finance, but also include a stimulus measure "go to campaign" . The third supplementary budget is likely to include not only the extension of the current measures, but also public investment for reconstruction of damaged areas from natural disasters, and expenditures for carbon neutral and digital transformation, two pillars of Prime Minister Suga's growth strategy.

....despite the highest government debt

According to the IMF, the size of Japan's fiscal measures to counter the Covid-19 pandemic out of GDP is the second largest after the US. This is even before the third supplementary budget is formed, showing how aggressive Japanese government is in fiscal policy despite a better Covid-19 situation compared to many countries. More surprising is that the Japanese government debt to GDP ratio is the highest in the world for a long time (meaning fiscal condition is unhealthy), but the government and society as a whole has not hesitated to be aggressive with fiscal policy.

BoJ's JGB purchases have been aggressive, but net saving is more important

One may think that the BoJ's aggressive purchase of Japanese government bonds (JGBs) is the reason why the Japanese government does not need to worry about fiscal sustainability. Indeed, the BoJ now holds more than 40% of government debt, which was less than 10% before former PM Abe started his administration in 2013. However, we think the BoJ's purchase is not the prime reason for the lack of crisis sense in Japan's fiscal management. A more important factor is the saving and investment balance of the country, which equals the current account balance. In Japan's case, saving of not only households, but also corporates exceeds investment probably due to low growth expectations with a grim demographic outlook, and the current account balance has stayed in surplus for more than 30 years except Q1 2014. This means private domestic saving has been easily sufficient to finance the government deficits.

Government's fiscal target looks unrealistic; new strategy needed, in our view

From the perspective of this saving and investment balance, it would appear the government does not need to worry about its finance, at least for a while. We thus share the view that the Japanese government does not need to worry about fiscal health now when Covid-19 is an immediate threat to the society and economy. However, we believe that the government needs to deliver reliable fiscal solutions to secure long-term sustainability once the situation stabilizes. The government has not officially given up its fiscal target to attain a surplus in primary balance of central and local government by FY2025 even though the target may now look unrealistic. New reliable strategy and target will be necessary, in our view. And, we think national burden (tax and social security contribution out of national income) will probably be raised.

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