Japan plans $265 billion stimulus program

Japanese Prime Minister Shinzo Abe announced plans to spend more that 28 trillion yen ($265 billion US) in an economic stimulus package to try and revive the Japanese economy.

In a recent speech, PM Abe said the stimulus package would be compiled next week. It was not clear how much would actually be new spending. After Abe's coalition won a large electoral victory in an upper-house election on July 10, he had ordered that a stimulus package be compiled to help boost the economy.

The government will likely need to issue new bonds to pay for the fiscal stimulus. Yasuari Ueno, an economist at Mizuho Securites in Tokyo said: “Tax revenues aren’t rising, and the funds for an extra budget are limited. This is all padding. Looking at what has been reported, they’re just lining up a bunch of different things. Once we see the details, I think the reaction is going to be worse.” He claims the government is pretending to have resources it does not have. The value of the yen has weakened in anticipation of the plan.

Fiscal stimulation is one of the "three arrows" of Abenomics, the other two are monetary easing and structural reforms. Some economists say that rather than new spending, Japan needs structural economic reforms and deregulation. There is a slowdown in overseas demand that may be exacerbated by the Brexit. The yen had been increasing in value. However the recent weakness in the yen in anticipation of the stimulus may improve Japan's export competitiveness. Abe said the government needed to support domestic demand and put the recovery of the economy on a firmer footing. On Friday there is a Bank of Japan policy meeting which may result in further economic stimulus. Abe will have no trouble passing new measures through parliament since his coalition has majorities in both houses

Japan is the world's third largest economy. Abe's announcement sent the Japanese and other stock markets higher. The size of the stimulus package is larger than many thought it would be and is nearly 6 percent of the size of the Japanese economy. It will likely include spending by national and local governments, as well as a loan program. Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities said: "The amount is so large that the stimulus package is bound to have a big economic impact. It is impossible to spend this much money in one extra budget, so this may take place over the next few years. The BOJ is likely to ease policy, including increasing government debt purchases, so you could say the BOJ can absorb the new debt. It also makes it easier to show that the BOJ and the government are working together."

As part of its package the government is planning to raise the minimum wage by 3 percent in order to help revive consumer spending.The Japanese economy is also burdened with a huge debt load that cost about half of tax revenues just to service. In 2013, public debt was more than one quadrillion yen ( $10.46 trillion US), which is more than twice Japanese annual GDP. Some analysts question whether even Abe's large stimulus package will be effective beyond giving stocks a temporary boost. Kyohei Morita, chief Japan economist at Barclays Capital said: "Markets are used to this size of stimulus, so their reaction is neutral. The effectiveness of the stimulus package itself is questionable."