August 14, 2014 6:20 am JST

Japan's stimulus to target regional economies, housing market

TOKYO -- Japanese Prime Minister Shinzo Abe plans to unleash an array of stimulus measures to keep the economy humming after a temporary slowdown caused by a sales tax hike, focusing on regional economies and the housing market.

     Taking a big hit from April's consumption tax increase, Japan's gross domestic product declined by an annualized 6.8% in the April-June quarter in real terms, with consumer spending falling 5%.

     The wage hikes agreed on during spring labor negotiations at top companies exceeded 2% for the first time in 15 years, but pay rises were still not enough to make up for the tax hike. To spur spending, the government will continue to press business communities for additional hikes.

     Consumption is particularly lackluster outside metropolises. To jump-start regional economies, the government will set aside a special fund of 4 trillion yen ($38.7 billion) in its fiscal 2015 budget to fund such projects as road and railway construction.

     To prop up the housing market, the government expanded a tax cut program for mortgages in April and introduced cash refunds for low- and middle-income homebuyers. But housing investment in the April-June quarter plunged 10.3%.

     Reducing gift taxes on cash assistance children receive from their parents toward home purchases is one way to sustain housing demand.

     The Land and Infrastructure Ministry will request a three-year extension of tax waivers for such cash gifts. The ministry will also seek to raise the cap from the current 10 million yen to over 15 million yen.

     The biggest miscalculation on the government's part was construction projects. Public works spending unexpectedly fell 0.5% in the April-June quarter. To blunt the impact of the tax hike, the government compiled a 5.5 trillion yen extra budget in February, but administrative delays and manpower shortages hampered the execution of the budget.

     Still, the value of public works contracts in April-June jumped 26% from the previous quarter. These projects will be counted toward GDP once construction begins. The Cabinet Office therefore projects that brisk public investment will bolster the economy starting with the current quarter ending in September.

     As early as the start of December, Abe will have to make a final decision on whether to raise the sales tax rate to 10% in October 2015 as planned. His ability to execute a growth strategy will be put to the test.