The Japanese economy is weak and unable to withstand the 'strong medicine'
The Japanese government approved an economic stimulus plan totaling 2.13 trillion yen (approximately 135.4 billion US dollars) on November 21. Against the backdrop of the continuous impact of the US and Canada's tariff measures, the domestic economy returning to recession, high government debt, soaring living costs for the public, and weak household consumption, this "tiger and wolf medicine" is not only difficult to cure, but may also "poison" Japan's already weak economy.
Economy returns to negative growth
Since the appointment of the new Prime Minister, Hayao Takashi, the economic situation in Japan has continued to deteriorate, and downward pressure has intensified.
The latest statistics from the Japanese Cabinet Office show that Japan's real gross domestic product (GDP) in the third quarter of this year decreased by 1.8% on an annual basis, and has experienced negative growth again since the first quarter of 2024. Analysis suggests that this data is a direct reflection of the impact of the US tariffs, with Japan's export industry, especially the automotive industry, being hit the hardest. The mid-term economic report of the Japanese Cabinet Office pointed out that, given the continued negative impact of the US tariff measures on the Japanese economy, the Japanese government has lowered its economic growth forecast for fiscal year 2025 from 1.2% to 0.7%.
The continuous expansion of price increases has hit domestic consumption. The report released by the Japanese Ministry of Internal Affairs and Communications on November 21 showed that in October this year, the core consumer price index (CPI) excluding fresh food in Japan increased by 3.0% year-on-year to 112.1, marking the 50th consecutive month of year-on-year increase, and the price increase continued to expand. Among them, the price of rice rose 40.2% year on year, and the price of rice products such as Rice and vegetable roll and sushi remained high. Affected by the increase in raw material prices, chocolate rose by 36.9% and coffee beans surged by 53.4%. Bank of Japan Governor Kazuo Ueda pointed out that the depreciation of the yen is becoming an important reason for pushing up consumer price levels, and the rise in import prices is gradually transmitting to the domestic retail end. It is also necessary to pay attention to the possibility of price increases affecting inflation expectations and fundamental price increases.
The capital market also intuitively reflects the current difficulties faced by Japan. For a period of time, the market's concerns about the deterioration of Japan's finances have sharply increased, coupled with the uncertain prospect of the Bank of Japan raising interest rates, leading to continuous selling of the yen in the market. Compared to the exchange rate of 147 yen per US dollar before the Liberal Democratic Party presidential election, the Japanese yen has depreciated by about 10 yen. On November 20th, the Japanese yen fell to the range of 157.5 yen to 157.9 yen against the US dollar, the lowest level in 10 months. At the same time, long-term treasury bond also experienced concentrated selling, and the yield repeatedly broke new highs. On November 18, the yield of newly issued 20-year treasury bond once rose to 2.810%, a 26 year high; And the 10-year yield also hit around 1.8% on the 20th, the highest level since 2008. In terms of the stock market, as of November 19th, the main index of the Tokyo stock market fell for four consecutive trading days, while the Nikkei 225 index quickly fell below 49000 points after opening on the 21st.
Stimulus policies are difficult to achieve results
To address the current economic difficulties facing Japan, the Japanese government recently held an extraordinary cabinet meeting and passed a large-scale economic stimulus plan, including 17.7 trillion yen through supplementary budget arrangements and 2.7 trillion yen from tax cuts. The expenditure is divided into "Life Security and Price Countermeasures" of 11.7 trillion yen, "Crisis Management and Growth Investment" of 7.2 trillion yen, and "Strengthening Defense and Diplomacy" of 1.7 trillion yen, covering topics such as reducing gasoline and diesel taxes, expanding energy subsidies, providing 20000 yen subsidies to children under 18 years old, and increasing the income tax threshold.
The economic community generally believes that the large-scale economic stimulus plan of Gaoshi Zaomiao will raise concerns in the market about Japan's fiscal and credit situation, which will not only fail to achieve the expected results, but may also further harm the Japanese economy.
In order to implement stimulus policies, the Takashi Hayao government recently announced in parliament that the Japanese government will abandon its goal of achieving annual fiscal surplus. Fiscal surplus is an important indicator of a country's stable financial situation, and Japanese media comments suggest that this marks a significant shift in government policies. According to statistics, before the epidemic, the Japanese government's supplementary budget was between 2 trillion yen and 3 trillion yen. However, after the epidemic, the supplementary budget exceeded 10 trillion yen, which has become the norm. Especially this time, the supplementary budget of the Gaoshi Zaomiao government reached 17.7 trillion yen. In order to ensure financial resources, the Japanese government can only raise funds by issuing treasury bond, but at present, the scale of Japanese debt has reached more than twice of the total economic volume, which is the highest level among major economies.
The so-called "original intention" of the large-scale economic measures of high market and early seedling is to solve the dilemma of high prices, but from the actual effect, it may actually exacerbate inflation. Against the background that Japan needs to increase the issuance of treasury bond to raise funds, if the Bank of Japan implements the policy of raising interest rates, it will increase the pressure on the Japanese government to repay its debt. Therefore, it is generally believed that the Takashima government has a negative attitude towards the Bank of Japan's interest rate increase. The direct consequence of the continued loose monetary policy is the depreciation of the Japanese yen, which leads to an increase in import prices and ultimately passes on to domestic goods. Some analysts believe that the economic stimulus measures of the Gaoshi Zaomiao government may not only offset the containment effect of high prices, but also have a counterproductive effect. It can be said that the economic stimulus measures of the Takashi Hayao government have entered a "dead cycle" in the current economic situation in Japan.
Some Japanese politicians pointed out that Japan's implementation of expansionary fiscal policies without a reliable source of funds may also lead to a repeat of the "Truss shock". In September 2022, Truss, the former British Prime Minister, announced a large-scale tax reduction plan under the condition of insufficient financial resources, which led to the collapse of the pound, government bonds and stock prices, and Truss himself stepped down. It is unknown whether Japan will follow suit and trigger a 'high market shock'.
Gaoshi Zaomiao claims that his fiscal policy is "proactive" and "responsible," but multiple Japanese media outlets and economists have pointed out that his large-scale economic stimulus measures are difficult to say "proactive" in terms of their effectiveness, and even harder to say "responsible" in terms of their impact on the Japanese government's financial situation and credit level. Some Japanese media even directly published editorials calling on Hayao Takashi to withdraw his "irresponsible" fiscal targets.