Japan ready to pursue flexible fiscal policy to offset economic risks

Japan’s government on Friday signaled its readiness to pursue flexible fiscal spending next year to offset risks to economic growth.

The risks to the outlook for the world’s third-largest economy in the wake of rising trade tensions and a growth slowdown globally could add pressure on the government to boost spending ahead of a planned sales tax hike in October.

In a long-term fiscal policy roadmap approved by cabinet on Friday, the government said it stands ready to take flexible macro-economic policy steps “without hesitation” if a downturn in overseas economies poses risks to Japan’s economy.

The pledge came after Bank of Japan Governor Haruhiko Kuroda told reporters on Thursday the government and the central bank must cooperate with each other to achieve sustained growth.

“Our current yield curve control is a framework under which the BOJ already implicitly cooperates with the government by keeping borrowing costs low,” he said of the central bank’s policy that caps long-term interest rates around zero.

Tokyo’s plan to raise the sales tax to 10% from 8% in October could darken the outlook for consumer spending, which makes up roughly 60% of Japan’s gross domestic product (GDP), at a time of slower demand from overseas.

The policy review likely reflected growing calls from ruling party officials for the government to boost fiscal spending to mitigate the pain from the tax hike.

Katsunobu Kato, head of the ruling Liberal Democratic Party’s general council and a close aide of Prime Minister Shinzo Abe, said last month the government can takes steps to prop up growth if the higher levy hurts growth.

Amid the threat of rising trade tensions taking a toll on global growth, Japan’s government revised down its assessment of the economy twice this year – in March and May – though it kept its view unchanged this month.

The previous sales tax hike to 8%, from 5%, in 2014 hit consumption and was blamed for a slump in the Japanese economy.

Kuroda on Thursday offered a strong sign that central bank policymakers are aware that risks to the global economy are rising.

“We will scrutinize such risks in guiding monetary policy,” he said. “On the other hand, there’s no change to our baseline scenario that global growth will pick up sometime during the latter half of this year.”

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