How Japan Is Intending To Grow Its Economy Again and What It Means For Singapore

It’s only been a short while since Japan’s Prime Minister Shinzo Abe managed a comfortable win in snap elections held last month. But, Abe has already been busy and has come out with new policies to revitalize Japan’s recession-hit economy. More specifically, Abe has released a fresh stimulus package and lower corporate taxes.

The stimulus

On 27 December, Japan’s policy makers approved a new fiscal stimulus package that’s worth some 3.5 trillion yen (around S$39 billion). It’s meant to boost consumer spending and regional economic activity, with the aim of dragging Japan out of recession.

This is already the third fiscal stimulus package that Japan has put in place in the last two years. A third of the proposed package is designed to assist small businesses and households which have seen their real incomes get squeezed as a result of the declining yen and increased input costs. Another 0.6 trillion yen will go toward revving up the local economies of Japan’s countryside. The remaining 1.7 trillion yen has been earmarked for infrastructure and public works.

The cuts

After the stimulus package was announced, tax cuts followed shortly. On 30 December, Japan announced that it will cut its corporate tax rate by 3.29 percentage points over the next two years (2.51 points starting April 2015 and the remaining 0.78 points in 2016). In addition, the nation also intends to gradually reduce its corporate tax rate from the current 35.6% to below 30% over the next 5 years.

The reason behind seems clear to me. According to Bloomberg, “Companies haven’t deployed a record 233 trillion [around S$2.57 billion] in cash holdings into investment or pay, with business spending dropping in the six months through September and wages adjusted for inflation dropping for 17 straight months through November.” By cutting corporate taxes, the Japanese government is hoping that domestic companies will be spurred on to raise wages and boost investment spending.

Although there’d be lesser tax-revenue for the Japanese government to spend as a result of the tax cuts, the government has plans to recoup some of those losses. Come April 2017, the amount of company income which can be written off to cover previous losses will be trimmed from the current 80% to 50%.

Foolish Takeaway

What impact will Japan’s economic policies have on Singapore? Despite all its woes, Japan is still the third largest economy in the world and one of the biggest importers of various resources globally. The measures the Japanese government has put in place to boost further economic growth are not only favourable to Japan if it succeeds – the whole world would likely be better off for it.

On a more granular level, investors in Singapore-listed companies which have large exposure to Japan, such as Mapletree Logistics Trust (SGX: M44U) and Global Logistic Properties (SGX: MC0), might benefit too if Japan’s economy improves.

But like I mentioned earlier, this is already the third stimulus package from Japan in two years and the previous two packages has quite clearly failed (Japan wouldn’t be in a recession if otherwise). So, as promising as the new policies might seem, there’s no guarantee it would succeed.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.