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August 3, 2016

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Japan agrees to US$132b package

JAPANESE Prime Minister Shinzo Abe’s cabinet approved 13.5 trillion yen (US$132 billion) in fiscal measures yesterday even as the central bank fought market speculation that it is preparing to put the brakes on monetary stimulus for the world’s third-biggest economy.

The government’s package includes 7.5 trillion yen in spending by the national and local governments, and earmarks 6 trillion yen from the Fiscal Investment and Loan Program, 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.

“I don’t think that would happen,” Kuroda said, when asked whether the promised “comprehensive review” might lead to reduced BOJ stimulus.

Kuroda 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.

The Japanese government will issue several hundred billion yen (several billion dollars) of 40-year bonds as soon as September to fund the new stimulus measures, two people with direct knowledge of the matter said.

The sources spoke to Reuters on condition of anonymity because the plans are not public, although Aso earlier said his ministry would consider 40-year debt, and dismissed speculation the government would consider issuing 50-year bonds.

The super-long bond sales, adding to 2.4 trillion yen worth of those planned for that maturity in the fiscal year to March, will help fund projects such as swifter construction of maglev train networks, the sources told Reuters.

Yesterday the prime minister 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 at 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 big public works spending, to the No. 2 post of Abe’s ruling party in tandem with a cabinet reshuffle today underscores Abe’s shift toward his “second arrow” of fiscal policy amid concerns monetary easing is reaching its limits.

The government estimates the stimulus would push up real gross domestic product by around 1.3 percent in the near term. The package will be implemented over several years, officials added.

SMBC Nikko Securities expects the package will push up real GDP growth by just 0.4 percentage point in the year ending March 2017 and 0.04 percentage point the next one.

When public works spending and cash payouts fade late in the fiscal year ending March 2018, Japan “will likely face a fiscal cliff,” said Koya Miyamae, senior economist at SMBC Nikko Securities.

“To prevent a fiscal cliff, the government will likely repeat large-scale stimulus. Considering that a general election must be held by late 2018, direct government spending would become larger, which could further delay Japan’s fiscal consolidation goal.”


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