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Japan: Government and Bank of Japan approve massive package to rekindle economic growth

February 1, 2013

The incoming Abe administration is living up to campaign promises of pulling the ailing Japanese economy out from its long slump. Prime Minister Shinzo Abe has pledged to implement the economic policies he calls the "three arrows", involving a bold monetary policy, flexible fiscal spending and growth strategies to stimulate private-sector investment. In this regard, the government and the Bank of Japan recently unveiled a series of measures to shore up the economy and beat the persistent deflation that has gripped the country for most of the past decade.

On 22 January, the government and the Bank of Japan (BoJ) announced in a joint statement that the Bank would double its inflation target to 2%. To achieve this target, the BoJ approved the launch - starting January 2014 - of an open-ended asset purchase scheme under the current Asset Purchase program, which is set to expire at the end of this year. According to the new scheme, the Central Bank will purchase about JPY 13 trillion of financial assets every month as long as it is judged necessary to achieve its new 2% inflation target. Specifically, the Bank aims to purchase about JPY 2 trillion in government bonds and JPY 10 trillion in treasury bills. The new Central Bank stance, which follows Abe's electoral campaign pledge of adopting a more aggressive monetary policy, has raised concerns regarding the independence of monetary authorities.

Earlier, on 11 January, the government approved the most ambitious fiscal stimulus plan since the financial crisis, which amounts to JPY 10.3 trillion (USD 116 billion). The stimulus plan is mostly composted by JPY 3.8 trillion to address disaster prevention as well as to rebuild the area damaged by the Tohoku earthquake; JPY 3.1 trillion directed to stimulate economic growth and JPY 3.1 aimed at revitalizing regions. That said, taking into account the contributions of local governments and the private sector, the cabinet expects the stimulus plan to reach a total of JPY 20.2 trillion. Furthermore, the government will make an additional contribution to state pensions of JPY 2.8 trillion. These fiscal measures are expected to drive up GDP growth by an additional 2% as well as to create around 600,000 jobs.

Regarding the last part of the new economic policy program, the government recently announced that it would introduce new measures to strengthen the country's competitiveness and growth potential. The government explained that it will adopt measures aiming at "reforming the economic structure" as well as "carrying out bold regulatory and institutional reforms", although no concrete measures were provided.

Meanwhile, on 29 January, the government approved the budget for the fiscal year 2013, which shifts spending from welfare benefits toward infrastructure programs and defense. The 2013 draft, which has yet to be approved by parliament, will partially finance the fiscal stimulus plan, while the remaining part will be funded through a supplementary budget for 2012. Simultaneously, the cabinet also approved a series of tax breaks, mainly for businesses.

Although the government announced that tax revenues will improve in the next fiscal year due to a better economic performance as a result of the aforementioned measures, some analysts reckon that the massive stimulus package will add even more pressure on Japan's massive debt burden, which, according to FocusEconomics Consensus Forecast panellists, exceeded 213% of GDP in 2012 and is expected to rise to 221% of GDP in 2013 and 226% of GDP in 2014. The government expects to bring the primary budget into balance only by 2020/21.

The Japanese yen has steadily weakened since the elections were announced on 14 November, in anticipation of shift towards an ultra-loose monetary policy stance supported by Prime Minister Shinzo Abe. On 31 January, the yen traded at 91.7 per USD, which was 5.7% weaker than the level seen in the previous month. In annual terms, the yen lost a whopping 20.3% against the green back and is currently trading at levels not seen since June 2010. Consensus Forecast panellists expect the yen to trade at 88.4 JPY per USD by the end of the year. For 2014, the panel projects that the yen will close the year at 92.4 JPY per USD.


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