27 October 2016
Though far smaller than a previous scheme in 2009, Japan's latest round of cash handout can help lift consumer spending in the country. Photo: Bloomberg
Though far smaller than a previous scheme in 2009, Japan's latest round of cash handout can help lift consumer spending in the country. Photo: Bloomberg

Japan’s handout scheme looks too small, or is it?

The size of Japan’s long-awaited stimulus package turned out to be much smaller than expected. Under the scheme, only about 22 million people (17 percent of Japan’s population) are expected to benefit and each person is going to get only 15,000 yen (US$148).

The amount is far less than the handout of 9,000 patacas (US$1,126) for each permanent resident in Macau this year, and also less than the HK$6,000 (US$775) that Hong Kong offered to its citizens five years ago.

Only low-income families are eligible for the welfare handout from Japanese government. For example, a three-person family should have an annual income of less than 2 million yen to be eligible for the dole. And the threshold for singles is less than 1 million yen.

The plan is going to cost Japanese government 330 billion yen. That represents 0.3 percent of Japan’s annual fiscal budget. 

Some observers have wondered if Japan has run out of ammunition as the nation is already grappling with over 900 trillion yen of government debt.

In 2009, Japan made another handout at much larger scale. All citizens were granted 12,000 yen last time, and those above 65 or below 18 were given an extra 8,000 yen. That plan benefited nearly 130 million people in Japan back then, and the government spent over 2 trillion yen.

But the generous handout has not paid off as expected. It was found that only 20 percent of the 2 trillion yen was spent on extra consumption and that it boosted Japan’s GDP growth by merely 0.1 percentage points that year.

Later, the Liberal Democratic Party of Japan, which advocated the handout, was defeated by the Democratic Party in an election.

Mainstream economists oppose cash handouts, citing Japan’s experience after 2009 to buttress their argument.

But some economists take a different view, arguing that small and targeted cash grants represent an effective route to reboot consumption.

Chris Blattman, a professor at Columbia University, found that it’s far more effective to give small amount of cash to the poor than non-cash support. The poor would spend the money on things they need most, like stationery or supplements for their kids.

But different families have different demands. Some may need stationery, while others may lack food. If the government decides a food or stationery handout plan, it may not fit the requirement of all people, causing waste and leading to high administration costs.

John Muellbauer, professor of economics at the University of Oxford, has suggested that the ECB should pursue quantitative easing (QE) “for the people”. Distributing money directly to low-income citizens in EU would work much better in stimulating consumption and economic growth than US-style money printing, he said.

However, his bold proposal has yet to be adopted by policymakers. In fact, cash grant does have some downside. Some low-income families are not good at managing money, and some parents may spend the money on drugs or gambling.

Academics and governments around the world are still exploring the pros and cons of small-targeted cash handouts. At the least, they seem to work as a supplement to existing welfare measures.

This article appeared in the Hong Kong Economic Journal on Aug 3.

Translation by Julie Zhu

[Chinese version 中文版]

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