JAPAN

Inflation is low in Japan (+0.5% on average over the past decade) and there is little chance that it will reach the central bank target (+2%) in the short and medium term, given soft aggregate demand. Against this backdrop, the central bank (Bank of Japan, BoJ) has further stepped up its accommodative stance since the beginning of the Covid-19 crisis. The annual limit for JGB purchases (which was JPY80tn) was removed in April 2020, signalling that the BoJ was ready to make more aggressive purchases if necessary. Financial assistance for companies and households (through special fund-supplying operations and fund-provisioning measures) amounting in total to JPY90tn (16.8% of 2020 GDP) has been put in place. In March 2021, the BoJ announced another slew of policy decisions: 1/ introducing a new “Interest Scheme to Promote Lending”, 2/ clarifying some yield curve control parameters (tolerable band for the 10-year yield of +/-25bp around the target along with asymmetric intervention focused on the upper limit) and 3/ continuing purchases of up to JPY12tn worth of ETFs and JPY180bn of J-REITs per year. For the remainder of 2021, the BoJ is likely to remain mostly on hold, monitoring the effectiveness of its actions.

The fiscal policy has also been eased significantly since the beginning of the crisis, despite the structural need for consolidation in theory (public debt at 238% of GDP in 2019, expected to increase to 266% in 2020). By the end of May 2020, two supplementary budgets had been approved by the Cabinet, with measures ranging from private-public sector projects to corporate loans and transfers to households. Beyond the very large headline totals announced (around 40% of GDP), we estimate that recovery-focused measures (vs. emergency measures against the Covid-19 shock) amount to 4.6% of GDP. In December 2020, the government adopted an additional fiscal support package (worth c.14% of GDP), with measures including incentives for firms to invest in digitalization and green technologies, as well as an extension of ongoing Covid-19 responses such as concessional loans to affected firms.