Abe unveils record 28t yen shot-in-arm for economy

Tokyo

PRIME Minister Shinzo Abe shocked financial markets on Wednesday by announcing that his government is planning a record fiscal stimulus of more than 28 trillion yen (S$359.7 billion), which paves the way for a new approach to growth and inflation-boosting initiatives by the Bank of Japan (BOJ).

The announcement, which came while he was in the southern city of Fukuoka, caught the markets off guard by its timing and scale.

In response, Tokyo stock prices jumped, and the yen dipped sharply.

The Nikkei 225 stock average gained 1.7 per cent to 16,664.82 after jumping by as much as 2.7 per cent initially; most other Asian stocks also took heart from the promised boost to the Japanese economy.

The yen, which has been suffering economy-damaging appreciation lately, eased back on the announcement.

Stephen Innes, senior trader for FX broker OANDA in Singapore, was quoted as saying that the package was "good for equities and for risk".

Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities, said that the amount is "so large that the stimulus package is bound to have a big economic impact".

But veteran Japan financial analyst Jesper Koll begged to differ; he told The Business Times that the initial "shock therapy" would not be as drastic as the headline figures have made it out to be.

While 28 trillion yen is the equivalent of 5.6 per cent of Japan's gross domestic product (GDP), the stimulus will be spread over several years and will amount to around 1 per cent of its GDP in the first year, he said.

The proposed package is due to be approved by the Cabinet on Aug 2, Kyodo News reported. It would then be included in a supplementary Budget for consideration by the Parliament's extraordinary session the following month, it said.

By revealing the outline of the package ahead of deadline, Mr Abe has opened the way for the BOJ to announce bold new monetary measures on Friday, when the central bank's latest Policy Board meeting ends. These measures will be linked directly to the government's fiscal package.

Mr Koll said that, for the BOJ, this is important because it wants to draw concrete links between its balance sheet and aggregate demand; the Abe government's fiscal package does exactly that.

"It clearly is not 'one-off', but a multi-year structural commitment to real change, which should lend lots of credibility to the BOJ's next step," said Mr Koll, chief executive officer of investment group Wisdom Tree, Japan and occasional advisor to the Japanese government.

Much of the 28 trillion yen stimulus will be applied to public infrastructure projects, such as the construction of ports to accommodate ultra-large ships and the development of magnetic levitation (maglev) trains. Such projects can be financed by project bonds, which do not add directly to the government's huge debt-service burden.

The BOJ is expected to be the major buyer of such bonds, which should also ameliorate the deterioration in the central bank's balance sheet brought about by successive and massive doses of quantitative and qualitative monetary easing over the past three years.

Up till now, the BOJ has focused its monetary easing on massive purchases of conventional Japanese Government Bonds (JGBs) as well as on buying up non-government financial assets such as real estate investment trusts (Reits) and other types of stock market-traded securities.

But this has not had the desired effect of producing the 3 per cent nominal GDP growth that Mr Abe envisaged when he introduced his Abenomics policies at the start of 2013; meanwhile, the BOJ's 2 per cent annual inflation target has slipped ever further out of reach.

Only this week, the Japanese Cabinet Office acknowledged that, under current scenarios, the economy would not expand in size to some 600 trillion yen by fiscal 2020 as Mr Abe had envisaged under his revised Abenomics plan. Likewise, the government Budget is unlikely to achieve primary balance by 2020.

Mr Abe is now using every trick in the book to pull the country out of its chronic stagnation and deflation, in order to justify the confidence voters placed in him by handing his ruling Liberal Democratic Party its recent landslide election victory.

The Japanese leader needs the assurance of a continued strong political base among voters so that he can be sure of backing for a planned revision to the Constitution, which will in turn require approval in a national referendum, analysts said.

Chief Cabinet secretary Yoshihide Suga said in a routine briefing on Wednesday that the ruling party and its coalition partner the Komeito were still hammering out details of the new stimulus plan.

In campaigning for an Upper House parliamentary election earlier this month, he had promised fresh help for the economy and instructed his minister responsible for economic affairs, Nobuteru Ishihara, to draw up the stimulus package.

Among other measures, Mr Abe will propose improved wages for childcare and eldercare workers, introduce needs-based scholarships for college students and reduce employment time required to earn pensions, Kyodo reported.

Earlier reports had put the likely size of the package at around 6 trillion yen; later reports suggested that it could be as large as 20 trillion yen, although nobody had expected that it would be as large as 28 trillion yen.

Analysts noted, however, that Japanese fiscal plans tend to be "rolling programmes" which often include some past and future spending. This means that it will be difficult to gauge the precise eventual impact on the economy until full details of the nature and timing of the stepped-up government spending are announced, they said.