Japan adopts record state spending to bolster economy ahead of VAT hike | Business| Economy and finance news from a German perspective | DW | 20.03.2014
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Japan adopts record state spending to bolster economy ahead of VAT hike

Japan’s parliament has adopted a record 2014 budget with higher spending on social security, defense and public works. The move is intended to spur flagging growth, feared to slow further due to a VAT hike in April.

Japan's parliament, on Thursday, approved a 2014 budget bill, envisaging record government spending to the tune of 95.9 trillion yen (680 billion euros, $936 billion).

Under the legislation, as overall state expenditures rise by 3.3 trillion yen compared with the current fiscal year, the conservative government of Prime Minister Shinzo Abe will boost social security spending by 1.4 trillion yen to cover rising welfare and pensions cost for Japan's ageing population. Moreover, the defense budget will rise by 130 billion yen to a total of 4.88 trillion yen. In addition, public works spending is to be 680 million yen higher, at a total of 5.96 trillion yen.

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Higher state spending is aimed to boost slowing growth in Japan, as the initial impulse of Abe's reflationary policies, dubbed Abenomics, is fading. In 2013, Shinzo Abe took office on a promise to overcome more than a decade of low growth with higher government spending. Japan's central bank joined the effort with ultra-loose monetary policy aimed at driving down the yen to boost Japan's exports. After initial success, however, the rate of expansion in the world's third-largest economy started to slow again in the middle of 2013.

Japan's gross domestic product (GDP) is expected to take another hit on April 1, when a sales tax increase, from the current 5 to 8 percent is to come into force. Economists fear the increase will throttle domestic consumption, accounting for 60 percent of Japan's GDP, thus killing off the recovery completely.

However, the government has argued that the increase in sales tax, also known as value added tax (VAT), is needed to rein in Japan's spiraling national debt, which is the highest among all industrialized nations at more than twice the size of the entire Japanese economy.

uhe/pfd (dpa, AFP)

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