The OECD projects Japan to swing toward restrictive fiscal policy in 2013, but this too is a very fluid situation. First, the Noda government is looking to provide some more fiscal stimulus, though a supplemental budget at this juncture does not seem politically possible. Second, and related, an election still seems to be possible before the end of the year, or early next 2013 at the latest.
This Great Graphic comes from the Financial Times Gavyn Davies. One key observation is that the austerity shift next year to the US from the euro area, though the UK has more wood to chop too.
The magnitude of the US contractionary fiscal thrust in part depends the degree to which the automatic tax hikes and spending cuts are actually implemented. There is significant uncertainty surrounding this, of course.
Noda’s support continues to crumble and the LDP look to lead the next government. The tightening the OECD projects in 2014 looks to be based on the assumption that the controversial retail sales tax hike will be implemented, but there is an opt-out clause, relating to the state of the economy.
The other issue, and the one that Davies writes about, is the IMF’s new research that claims the fiscal multiplier, which is the drag on the economy generated from austerity, is greater than before. Previously, the IMF had estimated the fiscal multiplier at 0.5, which means that $1 of austerity generated a 50 cent decline on GDP. The IMF’s new calculations suggest the multiplier may be 0.9-1.7, as monetary policy in the high income economies cannot, as was often the case in the past, offset or mitigate the fiscal austerity.
This post was originally published at Marc To Market and is reproduced here with permission.