Japan Approves $130 Billion Fiscal Measures as BOJ Denies Plans to Curb Stimulus, Reports Reuters

By Tetsushi Kajimoto

TOKYO – The cabinet of Japanese Prime Minister Shinzo Abe has approved a fiscal stimulus package worth 13.5 trillion yen (approximately $132 billion) as market speculation surrounding the central bank’s monetary policies intensifies.

The package consists of 7.5 trillion yen in spending allocated for both national and local governments, along with an additional 6 trillion yen sourced from the Fiscal Investment and Loan Program, which operates outside the general budget framework.

However, prior to this announcement, the market witnessed a significant sell-off of Japanese government bonds, marking the worst decline in over three years, driven by concerns that the Bank of Japan may reduce its aggressive bond-buying practices.

The Bank of Japan surprised investors on Friday by maintaining its current level of bond purchases, contrary to expectations for an increase, while also indicating a policy review set for September. This announcement heightened traders’ anxiety about potential changes in monetary policy.

Governor Haruhiko Kuroda refrained from commenting on the rise in government bond yields but assured that the forthcoming review would not result in any weakening of the central bank’s stimulus efforts. He expressed confidence that the "comprehensive review" would not lead to a reduction in support.

Kuroda made these remarks following discussions with Finance Minister Taro Aso regarding Abe’s stimulus measures. Both officials underscored the necessity of coordinated efforts between the government and the central bank to combat deflation.

To finance the new stimulus initiatives, the Japanese government plans to issue hundreds of billions of yen worth of 40-year bonds beginning in September. Sources familiar with the situation indicated that while Aso had mentioned considering 40-year debt, speculation about the issuance of 50-year bonds has been dismissed.

The introduction of these long-term bonds, in addition to the previously announced 2.4 trillion yen (around $24 billion) for that maturity in the fiscal year concluding in March, will support projects such as expedited construction of maglev train networks.

On Tuesday morning, Abe stated, "We compiled a strong economic package draft aimed at investing in the future." He emphasized that the aim of the package is not merely to stimulate demand but also to achieve sustainable economic growth driven by private sector engagement.

While the estimated value of the package stands at 28.1 trillion yen, this figure includes public-private partnerships and other elements not classified as direct government spending, potentially limiting its immediate impact on growth.

Following a series of disappointing economic indicators, including sluggish consumer spending, Abe had instructed his government to devise a stimulus strategy. The central bank’s upcoming policy review has unsettled investors, fostering uncertainty about future strategies. The price of 10-year government bond futures dropped 0.91 points on Tuesday, marking a total decline of 2.47 points over three sessions—the steepest fall in nearly a decade.

The anticipated appointment of Toshihiro Nikai, a proponent of substantial public works spending, to a senior position within Abe’s ruling party, alongside a cabinet reshuffle, highlights a pivot toward enhancing fiscal policy amid concerns that monetary stimulus may be reaching its limits.

Government projections suggest that the stimulus could elevate real gross domestic product by about 1.3 percent in the short term. Implementation of the package is planned over several years, according to officials.

SMBC Nikko Securities estimates that the stimulus will contribute only 0.4 percentage points to real GDP growth in the fiscal year ending in March 2017 and a mere 0.04 percentage point in the following year. As funding for public works and cash distributions declines toward the end of the fiscal year, Japan is expected to face significant fiscal challenges.

Koya Miyamae, a senior economist at SMBC Nikko Securities, remarked that to avert these fiscal challenges, the government is likely to resort to large-scale stimulus measures. With a general election set for late 2018, the increase in direct government spending may further postpone Japan’s fiscal consolidation objectives.