With Funds to Build NEOM City, GDP↑... Japanese Prime Minister on the Test Bench

Japan's Economic Growth Rate Expected to Rise Next Year
Impact of Stimulus for Building Neom City Boosting Domestic Demand
Some Forecasts Say Growth Rate Hard to Maintain Amid Monetary Tightening

[Asia Economy Reporter Lee Ji-eun] Thanks to Prime Minister Kishida Fumio's large-scale economic stimulus measures, Japan's economy is expected to experience a temporary growth spurt next year. However, there are also concerns that the Bank of Japan's (BOJ) monetary policy adjustments could threaten economic growth. Attention is focused on whether next year's economic growth will become a test for the Kishida Cabinet.

Japan's Economic Growth Rate to Increase by 0.4 Percentage Points Next Year

Japanese Prime Minister Fumio Kishida. [Image source=Yonhap News]

Japan has raised its economic growth forecast for the next fiscal year by 0.4 percentage points. At the Cabinet meeting held on the 22nd, the real gross domestic product (GDP) growth rate forecast for the 2023 fiscal year (April 2023 to March 2024) was revised upward from 1.1% to 1.5%. Next year's real GDP is projected at 558 trillion yen (approximately 5408 trillion won), surpassing the pre-COVID-19 peak of 554 trillion yen in 2018, marking an all-time high.

While neighboring countries have lowered their growth forecasts amid recession concerns, the Japanese government has issued a very optimistic outlook. The U.S. Federal Reserve recently slashed its economic growth forecast for the U.S. next year from 1.2% to 0.5%. South Korea also sharply lowered its GDP growth forecast from 2.5% to 1.6%, expressing concerns about a recession. China is expected to see a decline in economic growth following the easing of COVID-19 prevention policies. IMF Managing Director Kristalina Georgieva recently stated, "We are very likely to lower both China's economic growth forecasts for this year and next year."

Economic Growth Instead of Building NEOM City

The reason the Japanese government has particularly raised its economic growth forecast lies in the large-scale comprehensive economic measures promoted by the Kishida Cabinet. These measures are a massive economic stimulus package implemented by Prime Minister Kishida to counter high inflation and the depreciation of the yen. The total budget amounts to 71.6 trillion yen (approximately 692 trillion won). Considering that Saudi Arabia's NEOM City project, which plans to build a smart city 44 times the size of Seoul along the Red Sea coast, desert, and mountainous areas, has a project cost of 500 billion dollars (about 640 trillion won), it is clear that an enormous amount of funds is being invested.

The Japanese central government is allocating 29 trillion yen (about 280.55 trillion won), and local governments 10 trillion yen (about 96 trillion won). These funds are mainly used to support citizens' energy bills, raise wages for small and medium-sized enterprises, and invest in advanced sectors. Specifically, the measures include ▲ payment of 100,000 yen (about 970,000 won) for childbirth preparation ▲ support for wage increases in small and medium-sized enterprises ▲ increasing investment in human resources to 1 trillion yen over five years.

As a result of these investments, the Japanese government expects increased investment in the digital sector, with corporate capital investment projected to grow by 5.0%. Personal consumption, which accounts for half of Japan's GDP, is also expected to increase by 2.2%. When the comprehensive economic measures were announced, it was anticipated that if the policy succeeded, GDP could rise by about 4.6% after next year.

Revision of Monetary Policy Direction

Japanese Prime Minister Fumio Kishida. [Image source=Yonhap News]

However, some voices express concern that such optimistic forecasts might be a mirage. The BOJ's partial revision of its accommodative monetary policy could impact economic growth. Previously, on the 20th, the BOJ decided to widen the fluctuation range of long-term interest rates, which had been fixed at ±0.25%, to ±0.5%. The Nihon Keizai Shimbun analyzed that raising the upper limit of long-term interest rates to 0.5% effectively amounts to an interest rate hike.

The Nihon Keizai Shimbun reported that the BOJ's decision has led to a rise in Japan's long-term interest rates, increasing the risk of a housing market contraction and reduced capital investment. Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute, explained, "Assuming long-term interest rates rise by 0.2%, economic growth could decrease by 0.3 percentage points." He added that if the BOJ shifts its financial policy toward tightening, the growth rate could decline further.

Low Approval Ratings for the Kishida Cabinet

[Image source=Yonhap News]

If the economic outcomes fail to meet expectations, it could deal a fatal blow to Prime Minister Kishida's already low approval ratings. Kishida's approval ratings have hit record lows since the Cabinet's formation last October, following the Unification Church scandal that surfaced after former Prime Minister Abe Shinzo's death and a series of ministerial controversies. A survey conducted by Mainichi Shimbun from the 16th to 18th among 1,013 adults nationwide showed Kishida's approval rating at 25%. The ruling Liberal Democratic Party's approval rating was also 25%.

Combining the Cabinet's and the Liberal Democratic Party's approval ratings yields 50%, evoking the so-called "Aoki's Law." Aoki's Law is a hypothesis in Japanese politics that maintaining power is difficult if the combined approval ratings fall below 50%.

Within Japanese political circles, there is a forecast that Prime Minister Kishida will not fully enjoy the "golden three years" without major elections over the next three years. Nobuyuki Baba, leader of the Japan Innovation Party, held a press conference on the 15th, stating, "The Kishida Cabinet's golden three years are turning into three years of hell." He further predicted that Kishida might try to dissolve the House of Representatives in about a year to resolve unfavorable situations.

This content was produced with the assistance of AI translation services.