Prime Minister Shinzo Abe’s Cabinet on Friday approved a mammoth ¥20.2 trillion economic stimulus package, hoping to kick-start a recovery through public works spending, monetary easing and new growth strategies.
“Ending the yen’s appreciation and deflation is critically important to bring the economy out of its slump,” Abe explained to reporters the same day.
The stimulus is estimated to drive up Japan’s gross domestic product by 2 percent in fiscal 2013, which starts April 1, and create around 600,000 new jobs. But such progress won’t come cheap. The raft of policies will cost the government some ¥10.3 trillion, about half of which is to be covered by new construction bonds, according to government officials.
Emphasizing that the scale of the expenditure is one of the largest on record, Abe said his administration will “work at a different dimension” to revive the economy compared to the ousted Democratic Party of Japan-led government.
The DPJ administration “failed to come up with a plan as to how the country can gain income,” Abe said. “They did not consider how to enlarge the economic pie.”
Abe’s Cabinet is also scheduled to approve Tuesday a ¥13 trillion supplementary budget for the current fiscal year through March 31, which will cover the cost of the stimulus package as well as a shortage of basic pension payouts.
“It is important to utilize the funds to be supplied by the Bank of Japan. The government will be creating demand, in order to stop the economy from falling into a further slump,” Abe said.
The policies agreed on Friday include ¥3.8 trillion for what the government terms “reconstruction and antidisaster management.” Some ¥1.6 trillion of this sum will go toward accelerating reconstruction efforts of areas of the Tohoku region devastated by the 2011 Great East Japan Earthquake. In other areas, about ¥2.2 trillion has been allocated for inspections and repairs of aging infrastructure.
The government is also splashing out ¥3.1 trillion to stimulate economic growth, including ¥1.8 trillion to aid the private sector, especially innovative research, and to promote more efficient energy use and recycled power.
However, Abe’s new LDP administration still has more to do if it hopes to achieve significant GDP growth in the April-June quarter in order to implement the planned consumption tax hikes. Raising the levy to 8 percent from 5 percent in April 2014 and then to 10 percent in October 2015 is considered imperative if Japan is to begin addressing its shuddering ¥1 quadrillion worth of public debt.
Pundits said the policies unveiled Friday appear to be on the right track — at least for now.
“The impact from public works spending will be quickly felt,” Hisashi Yamada, chief economist at Japan Research Institute Ltd., told The Japan Times on Friday. “With the yen easing and working in favor of corporate performance, the conditions required to raise the sales tax are likely to be met.”
But the prime minister’s spending spree will also have some side effects — most notably by raising public debt to unprecedented levels.
“The impact of spending on public works will only last temporarily. The government needs to come up with a vision that will get the private sector rolling toward self-sustained growth,” Yamada said, warning that if the stimulus package fails to spark growth, all it will achieve is an even less sustainable amount of government debt.
Another key policy pushed in Friday’s package is Abe’s willingness to shorten the government’s leash on the BOJ, and to pressure the central bank to implement aggressive monetary easing. “We expect the BOJ to pursue aggressive monetary easing under a clear inflation target,” the economic package said.
Some pundits, however, fear a continuation of this pressure on the BOJ will threaten its independence from the government.