The first major policy initiative in 2013 towards recovering from recession comes from Japan’s Prime Minister, Shinzo Abe, as he announces plans to spend 10.3 trillion yen ($116 billion) to boost growth.
Abe said Friday “beating deflation and curbing the yen’s appreciation is crucially important” and that a “daring monetary policy is essential.”
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According to the statement released by the cabinet office, out of the total package, around 3.8 trillion will be for disaster prevention and reconstruction, and approximately 3.1 trillion yen will be directed towards inspiring investment and other measure.
“Aiming to emerge from deflation, we’ll build a framework for strengthening cooperation between the government and the Bank of Japan,” Abe’s government said in a statement. “We strongly expect the BOJ to conduct aggressive monetary easing with a clear price target.”
The gross domestic product will see a surge of around 2 percentage points and will help create around 600,000 jobs, according to the government.
“Abe will probably give the economy more shots in the arm and turn a blind eye to fiscal discipline until the elections,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “There’s a risk that long-term bond yields will rise unless the government takes measures to restore fiscal health.”
This step of Prime Minister Abe would help him to maintain support for his Liberal Democratic Party before upper house election in July, after the yen declined through 89 per dollar today.
The stimulus “shows a clear commitment to economic revitalization,” Abe said at a press conference today in Tokyo. “These are not pork-barrel” measures, he added.
The central bank in Japan is seeking to adopt 2 percent inflation target supported by Abe, double the current goal of 1 percent, though not setting a deadline for achieving it.
According to Kohei Okazaki, an economist at Nomura Securities Co. in Tokyo, the stimulus will be a big lift for Japan’s ailing economy. The move will pressurize the central bank as the government can confidently say that it is taking steps, whatever it can.
The data showed some economic challenges faced by the new Prime Minister. The larger-than-expected current account deficit was one of them. In the past three years, big manufacturers turned out to be most distrustful, even as a sliding yen aided exporters from Toyota Motor Corporation (NYSE:TM) (TYO:7203) to Panasonic Corporation (NYSE:PC) (TYO:6752).
To fund the stimulus package, government will gather a 13.1 trillion yen extra budget in the current fiscal year. Some of the funding will be from selling about 5 trillion yen in bonds. Additional bond issuance for this fiscal year will be about 8 trillion yen, counting an earlier plan to sell 2.6 trillion yen in so-called bridge bonds to cover pension payments.
According to the government, the major effects of this fiscal stimulus will be experienced in the fiscal year which starts in April.