Japanese Prime Minister Shinzo Abe’s cabinet approved 13.5 trillion yen (€87.8 billion) in fiscal measures yesterday.
The government’s package includes 7.5 trillion yen in spending by the national and local governments, and earmarks ¥6 trillion from the Fiscal Investment and Loan Programme, which is not included in the government’s general budget.
But even before the announcement, Japanese government bonds saw their worst sell-off in more than three years as investors feared the Bank of Japan may ratchet back the pace of its aggressive government bond buying.
The BOJ disappointed markets on Friday by keeping bond purchases steady, defying expectations it would hoover up more, and made traders even more nervous after announcing it would re-evaluate policies in September.
Governor Haruhiko Kuroda declined to comment on the spike in JGB yields but said the planned review will not lead the BOJ to weaken its stimulus.
Precisely how the spending will be financed is unclear
“I don’t think that would happen,” Kuroda told reporters, when asked whether the promised “comprehensive review” might lead to reduced BOJ stimulus.
He spoke after meeting Finance Minister Taro Aso to discuss Abe’s stimulus package. Kuroda and Aso stressed the importance of concerted government and BOJ efforts to defeat deflation.
Yesterday morning, Abe said “We compiled today a strong economic package draft aimed at carrying out investment for the future.”
“With this package, we’ll proceed to not just stimulate demand but also achieve sustainable economic growth led by private demand.”
The package’s headline figure is 28.1 trillion yen, but it includes public-private partnerships and other amounts that are not direct government outlays and thus might not give an immediate boost to growth.
Abe last month ordered his government to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his ‘Abenomics’ mix of extremely accommodative monetary policy, flexible spending and structural reform promises.
The BOJ’s review has spooked investors, who are unsure how BOJ policy might change.
The price of 10-year JGB futures closed down 0.91 point yesterday to 151.33, and has dropped 2.47 points in the last three sessions – the biggest three-day fall since May 2013.
The expected appointment of Toshihiro Nikai, an advocate of public works spending, to the No. 2 post of Abe’s ruling party in tandem with a Cabinet reshuffle today underscores Abe’s shift towards his “second arrow” of fiscal policy.
Precisely how the spending will be financed is unclear, although the government is considering issuing construction bonds. The stress on fiscal steps is raising doubts about Japan’s ability to fix its already massive debt.
The government estimates the stimulus would push up real gross domestic product by around 1.3 per cent in the near term. The package will be implemented over several years, officials added.