Japanese Prime Minister Shinzo Abe said his government would compile a stimulus package of more than US$265 billion next week to reflate the flagging economy, although it was unclear how much would be spent to directly boost growth, Reuters reports.
The size of the package, at 28 trillion yen (US$265.30 billion), exceeds initial estimates of around 20 trillion yen and is nearly 6 percent the size of Japan’s economy, the news agency said.
It will consist of 13 trillion yen in “fiscal measures”, which likely includes spending by national and local governments, as well as loan programs.
“We need to take steps to support domestic demand and put the economy on a firmer recovery path,” Abe said in a speech in southern Japan on Wednesday. “I want to use various measures to increase our escape velocity from deflation.”
Abe’s announcement came earlier than expected and pressures the Bank of Japan to match his big spending plan with additional monetary easing at its rate review ending on Friday.
“The amount is so large that the stimulus package is bound to have a big economic impact. It is impossible to spend this much money in one extra budget, so this may take place over the next few years,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.
“The BOJ is likely to ease policy, including increasing government debt purchases, so you could say the BOJ can absorb the new debt. It also makes it easier to show that the BOJ and the government are working together.”
Many BOJ policymakers prefer to hold off on easing as they expect the fiscal stimulus package to boost growth and brighten the prospects for hitting their 2 percent inflation target.
But yen moves and political considerations could be decisive factors for the BOJ policymakers agonizing over whether to expand stimulus or to save their dwindling policy resources for when the economy takes a turn for the worse.
Japan’s Nikkei stock average rose nearly 2 percent on the larger-than-expected stimulus package, while the yen slumped against the dollar.
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