PM Abe’s $265 Billion Stimulus Plan Puts Pressure on BOJ to Ease, Reports Reuters

By Leika Kihara and Stanley White

TOKYO – Japan’s Prime Minister has announced an unexpectedly large stimulus package amounting to $265 billion, aimed at revitalizing the country’s economy, which is the third largest in the world. This move places additional pressure on the central bank to implement its own monetary stimulus measures later this week.

The announcement, which came sooner than anticipated, has positively influenced Japanese and other Asian stock markets, while simultaneously causing the yen to weaken. However, the details regarding the extent of direct government spending in this package remain unclear.

The stimulus package totals over 28 trillion yen ($265.30 billion), surpassing earlier projections of around 20 trillion yen, representing nearly 6 percent of Japan’s GDP. It includes 13 trillion yen in what is described as "fiscal measures," likely incorporating spending by both national and local governments as well as loan programs.

"We must take steps to support domestic demand and place the economy on a solid path to recovery," said Prime Minister Shinzo Abe during a speech in southern Japan. "I aim to implement various measures to enhance our escape velocity from deflation."

Market analysts anticipate that the Bank of Japan will respond with its own measures during its rate review scheduled for Friday.

"The magnitude of this stimulus package suggests it will have a significant economic impact. It’s improbable to spend this much in just one extra budget, so expenditure may occur over the next few years," explained Hiroshi Miyazaki, a senior economist at Mitsubishi UFJ Securities. He also pointed out that the Bank of Japan is likely to ease its policies, including increasing government debt purchases, which could facilitate collaboration between the central bank and the government.

Although many policymakers at the Bank of Japan would prefer to delay further easing, anticipating that the fiscal stimulus will spur growth and improve prospects for achieving a 2 percent inflation target, the movement of the yen and political factors could influence their decision-making.

In response to the announcement, Japan’s Nikkei stock index rose nearly 2 percent, while the yen fell against the U.S. dollar.

Earlier this month, Abe tasked his government with devising a stimulus plan to reinvigorate an economy struggling from weak consumer spending, despite three years of his "Abenomics" strategy, which combines ultra-low monetary policy, significant government spending, and structural reforms.

Among the initiatives in the package, the government plans to increase the minimum wage by 3 percent this fiscal year to encourage consumer spending. Sources indicated that the package would have a headline figure of at least 20 trillion yen, with about 9 trillion yen arising from a combination of direct government spending and loan programs.

However, fiscal spending is expected to be adjusted to 13 trillion yen. The remainder will likely come from state subsidies to private companies and lending from quasi-government entities, which do not constitute direct government spending and may not provide an immediate boost to economic growth, according to analysts.

Abe’s administration has provided limited clarity on the financing of the package, raising concerns about Japan’s fiscal health. Reports suggest the funding will be drawn from state budgets over several years, and while the government is contemplating issuing construction bonds, it remains cautious about extensive debt issuance.

The finance ministry has denied a report regarding the issuance of 50-year government bonds for the first time to take advantage of low-interest rates.

While Abe’s announcement has briefly lifted stock prices, some analysts are skeptical about the durability of its effects. Kyohei Morita, chief economist for Japan at Barclays Capital, remarked, "Markets are accustomed to this scale of stimulus, so their response is moderate. The efficacy of the stimulus package itself is uncertain."