Japan’s new government unveiled a massive US$226.5 billion stimulus plan yesterday in the latest bid to boost the world’s third-largest economy, with plans to rebuild disaster-hit areas and beef up the military.
Japanese investors welcomed the news, with the Nikkei index surging to a 22-month high and the yen tumbling, but analysts questioned its long-term effect and warned it could lead to more misery further down the line.
Japanese Prime Minister Shinzo Abe, who came to power in a landslide election victory last month, followed through with one of his key pledges by outlining details of a big-spending plan designed to create jobs and end deflation.
“With the measures, we will achieve real GDP growth of 2 percent and 600,000 jobs will be created,” he told a briefing.
Japan’s economy shrank by 0.6 percent in 2011, while last year’s GDP figures are yet to be released.
“It is crucially important to break out of prolonged deflation and the high yen,” he added.
A hawkish Abe also repeated his call for Tokyo and the Bank of Japan (BOJ) to “join hands” on driving growth, comments that have stoked tension between the him and BOJ Governor Masaaki Shirakawa over perceived threats to its independence and policy decisions. The new prime minister had pledged before the election that he would press the central bank to carry out more aggressive monetary easing and said that if it did not agree to a 2 percent inflation target he would change the law regarding its remit. While the total size of yesterday’s package came in at ￥20.2 trillion (US$226.5 billion), Tokyo’s direct spending on economic stimulus and pension financing amounts to about ￥13 trillion, with local governments and the private sector providing the rest, Abe said.
Rebuilding the disaster-struck areas, making more schools and hospitals earthquake resistant, and upgrading aging infrastructure were among the planned measures.
It will also see ￥180.5 billion yen spent on missiles, fighter jets and helicopters to beef up the military as Tokyo is embroiled in an increasingly bitter territorial row with China over a group of uninhabited islands in the East China Sea.
Yesterday’s stimulus is the latest unveiled by successive governments who have tried to lift the economy from years of anemic growth.
Investors gave a big thumbs up, with the Nikkei surging 1.5 percent in the afternoon to levels not seen since before the March 2011 earthquake and tsunami disaster.
The yen also tumbled to ￥89.35 against the US dollar, its lowest since June 2010 and a far cry from the record high ￥75 it hit in late 2011, which hammered exporters.
However, the big spending plans have stoked fears over Japan’s already tattered fiscal health, the worst among industrial countries, with public debt standing at more than twice the size of the economy.