Japan Approves Another Trillion Dollar Stimulus Package To Combat Covid-19 Pandemic Impact

Japanese Prime Minister Shinzo Abe’s cabinet has approved a $1.1 trillion stimulus package to help mitigate the impact of the covid-19 pandemic on the world’s third-largest economy.

This package includes about $310 billion in direct spending.

“We must protect business and employment by any means in the face of the tough road ahead,” Abe told lawmakers on Wednesday. “We must also take all necessary measures to prepare for another wave of [the] epidemic.”

The new package will include increased medical spending, assistance to companies struggling with rent payments and more subsidies to companies enduring drop-offs in sales.

“We are determined to protect the Japanese economy,” said Taro Aso, deputy prime minister and minister of finance. “We are facing a crisis that goes beyond the scale of the Lehman [Brothers] shock [of 2008].”

The historic program comes on the heels of another $1 trillion scheme introduced just last month.

All told, Japan has now signed off on stimulus spending of $2.18 trillion, or about 40% of the country’s entire gross domestic product – and which is almost equal in magnitude to the $2.3 trillion stimulus package in the U.S.

The Japanese economy has already sunk into a recession and Abe’s government has been criticized for its handling of the pandemic.

“When popularity goes down, politicians tend to want to do something big,” said economist Hiroshi Shiraishi at BNP Paribas. “These measures are designed to stop or alleviate the damage done by the pandemic on companies and individuals, not to boost growth. So even with this package, Japan’s pickup will be very gradual.”

The government will fund the costs of the new stimulus by issuing an additional $300 billion in government bonds under the auspices of the second supplementary budget for the current fiscal year ending in March 2021.

For the full fiscal year, the government will issue nearly $770 billion in bonds.

However, analysts warn that with finances already stretched, continued bond buying could increase market volatility.

“The [Bank of Japan’s] yield curve control should prevent a spike in long-term interest rates,” said Chotaro Morita, chief bond strategist at SMBC Nikko Security. “Volatility in the [Japanese government bond] market will depend on the [Bank of Japan’s] ability to control its bond purchases.”

Bank of Japan Governor Haruhiko Kuroda told parliament on Tuesday the central bank will purchase more government debt if the yield curve needs to be lowered.

For the current fiscal year, new bond issuance will comprise a record 56.3% of the annual budget.

“There’s a possibility of a third extra budget,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank. “Japan may face the risk of [a] credit downgrade in the medium to long run.”

Yuki Masujima, an economist at Bloomberg, said: “Japan is preparing another monster fiscal stimulus package. The cost will be a mind-spinning surge in the debt-to-GDP ratio this year. The benefits, though, should be worth it. The much-needed support for hard-hit companies should reduce the chances of more lasting damage (a surge in bankruptcies and unemployment) that would impede a recovery once the pandemic abates.”

Although Japan lifted its nationwide lockdown last week, economists are forecasting grim developments. Analysts expect GDP to plunge by more than 20% in the second quarter and warned that any economic recovery will be gradual.