Prime Minister Shinzo Abe's economic policy leadership credentials got a huge boost last week, with his cabinet approving a massive extra fiscal spending package. This confirms Japan is a standout among G7 countries – the only government capable and willing to enact rational and practical fiscal policies. 

While American and European political leaders appear stuck and insist that it is up to the central bankers who need to do more, Japan wastes no time. For the 2020 outlook, Japan now has the lowest recession risk.

Politically, it is tempting to contemplate why it is that Abe's Japan and Xi Jinping's China are left as the only major economies that appear to have taken to heart the lessons learned from the lopsided global obsession with monetary policy. However, what do Japan and China share that the West does not? Possibly a functioning government – China by undemocratic top-down dictate; Japan by a de-facto super majority in a democratically elected Parliament.

Financially, the positive impact of fiscal policy on market performance should not be underestimated. Abe's new package is a massive ¥26 trillion, equivalent to almost five per cent of GDP but of this, about half of the funds are poised to feed GDP directly, primarily by rebooting public infrastructure spending. All said, it is expected that 2020 GDP should get a boost of around 0.5-0.75 per cent. Consensus forecasts for next year will have to be revised up.

In terms of timing, the fiscal policy was released at the right time. That said, there is more to do when it comes to structural policies that lift Japan’s potential growth rate.

Firstly, there is room to create a "start-up nation Japan" entrepreneurship ecosystem. Nothing ensures sustainable prosperity like a thriving entrepreneur culture. Every one per cent increase in the number of entrepreneurs raises potential GDP by approximately 0.5 per cent. To support this, the government tax council just proposed a tax incentive for corporate investments in start-ups, with 25 per cent of any start-up investment eligible for a tax deduction for investments up to $1 million. 

For 2020, this tax incentive is poised to turbo-charge the already promising trend of corporate venture capital in Japan. 

Secondly, Japan can cut entitlements by introducing means testing. To introduce a greater sense of social fairness and guarantee sustainability of Japan's socialised medical and social security systems, raising out-of-pocket contributions proportionally to net financial assets is a practical solution. In fact, post-Abe Liberal Democratic Party (LDP) young leaders are beginning to seriously study how to get this done. 

For certain, for a nation obsessed with actively minimising the gap, financial means testing for public services should prove politically popular. If this works in the medical services sector, the net impact should help boost potential growth as well as reduce fiscal dislocations.

All this being said, Japan seems to be on track for exemplary policy practicality in place to deliver positive upside surprises for 2020 and beyond. It should then be no secret that Japan could well be poised to perform well in the 2020 Olympic year.

Disclaimer: This article was issued by Maria Fenech, credit analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.