TOKYO -- The Japanese government hopes to use its record budget for fiscal 2019 to spur consumer spending after next year's consumption tax hike, but it may have trouble dealing with the aftermath if demand drops off as feared.
The more than 101 trillion yen ($908 billion) budget, approved Friday by Prime Minister Shinzo Abe's cabinet, includes about 2 trillion yen in measures to soften the blow from raising the 8% consumption tax to 10% next October, plus tax breaks on homes, vehicles and the like expected to save taxpayers another 300 billion yen. Tokyo sees this offsetting the added burden from the tax hike, which is estimated at roughly 2 trillion yen after accounting for such other aid as free pre-elementary education.
A centerpiece of the stimulus measures will be a system offering reward points worth 5% of every purchase made with cashless payment methods, such as credit cards and mobile apps. Because the rebate will exceed the 2 percentage point tax increase, this amounts to a tax cut.
The program, which will run during the nine months between the tax hike and the 2020 Tokyo Olympics, aims to both bolster the economy and encourage the spread of cashless payments.
But how effective will such measures be? The points system offers a 5% rebate for purchases at small and midsize businesses, but just 2% at convenience store and restaurant chains -- and no points at all at big supermarkets. Three retail industry groups on Friday urged the industry ministry to rework the program, arguing that it is difficult for consumers to understand in its current form.
The government will also distribute shopping vouchers to low-income households and those with young children to address the regressive nature of the consumption tax increase. But households may stash away the money they save with the vouchers instead of putting it back into the economy by spending it.
And Japan's chronic labor shortage could stymie plans for an additional 1 trillion yen in public works spending.
Economists warn that when these measures end after the Olympics, Japan may face an "economic cliff," with demand shrinking dramatically. The stimulus could simply spur consumers to make purchases sooner at the expense of future demand, while the end of the rebate program will essentially raise taxes.
The more stimulus measures the government implements, "the bigger the economic swings will be," warned Kenzo Yamamoto, a former executive director at the Bank of Japan, arguing that such steps will only postpone an eventual drop-off.
Yamamoto expressed concern that Tokyo will keep adding fiscal stimulus each time demand flags.
If consumer spending drops off after the Olympics, the government could face calls to keep the rebate program going. Asked on Friday about the possibility of the post-hike stimulus measures becoming permanent, Finance Minister Taro Aso said only that the government "will decide after thoroughly gauging" economic conditions.
Tokyo's move to mobilize fiscal policy to shore up the economy even with debt already sitting at double Japan's gross domestic product owes partly to the central bank, whose ultralow-rate policy has helped minimize interest payments on borrowings. Interest payments account for around 9% of government spending, just slightly above levels in the U.S. and the U.K.
But this loose monetary policy leaves the BOJ with little room to maneuver when the next slowdown hits. With upper house elections coming in the summer of 2019, the government faces mounting pressure to inject more money into the economy, potentially further increasing its reliance on fiscal policy.
If Tokyo "can't rein in fiscal spending, it will cause serious problems for future generations," said Hideo Kumano, chief economist at the Dai-ichi Life Research Institute.