Japan budget clears parliament, more fiscal stimulus to follow

Japan’s parliament approved on Tuesday a record 96.72 trillion yen ($851.5 billion) state budget for fiscal 2016, paving the way for a fully-fledged debate on additional stimulus spending to spur the flagging economy.

Prime minister Shinzo Abe seeks to front-load spending for the annual budget for the coming fiscal year from April and to adopt a fresh extra budget, while speculation is rife that he may again delay a sales tax increase planned for April 2017.

The fiscal 2016 budget was given a final approval by the upper house of parliament, with the ruling bloc’s firm majority.

Abe needs to strike a delicate balance between conflicting needs to curb the industrial world’s heaviest public debt burden and to revive the economy teetering close to another recession.

Sources have told Reuters that the government has begun considering a tax-hike delay and more fiscal stimulus, with people around Mr Abe calling for additional spending of 5 trillion to 10 trillion yen to stimulate consumption.

Mr Abe is expected to decide on the sales tax and stimulus spending around a Group of Seven summit that he will host late next month, after analysing the first quarter GDP data due earlier that month.

"If they decide to go ahead with the tax hike, an extra budget would likely be around 10 trillion yen. If they delay it, the stimulus would be smaller at about 5 trillion yen," said Kiichi Murashima, economist at Citigroup Global Markets Japan.

The April 2014 tax increase to 8 per cent from 5 percent hit consumers hard, leading to a recession, despite a 5.5 trillion yen extra budget adopted earlier to ease the pain from the tax hike. It forced Mr Abe to delay another tax increase to 10 percent - initially scheduled for last October - to April 2017.

“Expectations for fiscal policy is rising worldwide due to a limit in monetary policy. But it would be quite hard for fiscal stimulus to boost the economy sustainably,” Mr Murashima noted.

The 2016 budget features a bulging welfare outlay to cope with a fast-ageing population, with Mr Abe taking advantage of higher tax revenue, and low borrowing costs due to aggressive stimulus by the central bank, for boosting spending.

Ahead of the budget’s approval, Mr Abe has steered clear of debating in public additional fiscal spending, as doing so may have risked a delay in passage of the budget bill.