Roundup: Japan announces 266 bln USD stimulus package to kickstart sluggish economy

Japanese Prime Minister Shinzo Abe announced on Wednesday that his government would compile a stimulus package of more than 28 trillion yen (266 billion U.S. dollars), in a bid to shore-up the world's third-largest economy that has been flagging despite various installments over the years of the leader's own blend of economic policy mix dubbed "Abenomics."

The current size of the budged announced by Abe exceeds by some way median analysts' forecasts for a package of around 20 trillion yen, although it is not yet known how much of the allocation will be earmarked specifically for stimulus measures to drive economic growth.

"We need to take steps to support domestic demand and put the economy on a firmer recovery path," the prime minister said at a speech in Fukuoka, southwest Japan.

"I want to use various measures to increase our escape velocity from deflation," the Japanese leader added on Tuesday.

"We'll compile the stimulus package next week, focusing on investment in future growth and taking a significant step toward a new agricultural policy," the prime minister also said.

The government has previously said it plans to boost spending on high growth sectors including infrastructure building, farm exports as well as tourism, which has been booming of late owing to the increasing purchasing power of visitors coming here when the yen declines.

Abe's earlier-than-expected announcement Wednesday took markets here a little by surprise as did the larger-than-expected allocation, although leading economists have been quick to point out that a portion of the budget will almost certainly be comprised of the government's fiscal loan and investment program, which is unrelated to the state budget.

Abe's cabinet is now expected to formally approve the budget next Tuesday.

Sources close to the matter said Wednesday that the government's bold spending measures, despite the economic malaise here that necessitates it, will increase pressure on the Bank of Japan (BOJ), with many insiders believing it, to roll out additional monetary easing measures at the conclusion of its two-day policy meeting this week.

Abe, his finance ministry and the central bank, have all been under mounting pressure from opposition parties and the electorate to elevate the nation beyond the doldrums of decades of deflationary pressure and negligible growth, something that the prime minister has failed monumentally to do since retaking office in 2012, with a number of "Abenomics" installments and reboots since then failing, despite pledge after pledge of economic revival.

With a recent upper house election won by Abe's ruling Liberal Democratic Party-led coalition, largely seen as a referendum for Abe to garner more support and time from the public to see his latest "Abenomics" agenda through to fruition, the bold move announced Wednesday, economists said, has been made to ensure that economic headway will be quantifiable.

This, despite ongoing concerns about the prime minister's vital structural reform policies, which have yet to take shape, but have an immeasurable bearing on the mid-to-long-term future health of Japan, is already in the grip of a demographic crisis that is squeezing the state's budget, with the grip only set to further tighten as the population continues to simultaneously age and shrink, while the government continues to grapple with public debt standing at well more than twice the size of Japan's economy and is the highest in the industrialized world.

With an extra budget, however, also in the frame for the fiscal year to help fund the current stimulus measures and with the BOJ likely poised to move, the prime minister is counting on these measures to to have a tangible effect on ongoing growth and reflationary measures, the latter of which has a target of 2 percent.

Abe's delayed tax hike plan has had both positive and negative effects on the state's balance books in the current and near-future, but the economy will almost certainly have to be in a definitive growth phase to avoid the kind of technical recession brought on when Abe previously hiked the consumption tax from 5 to 8 percent, to survive the second delayed hike to 10 percent, economists have said.

Most pressing however, analysts with knowledge of the matter said Wednesday, is that Abe will want the new package to fortify against any further fallout from Britain opting to leave the European Union, which has already wreaked havoc on global stock and currency markets and seen the yen pushed higher as a safe haven currency against a basket of others.

A strong yen is not welcomed by the government here because Japan, as an export nation, relies on a comparatively weak yen to ensure that its overseas profits are boosted when repatriated on favorable exchange rates and that Japanese goods remain competitive against their counterparts in international markets.

The yen's rise of late has erased billion of yen worth of profits off notable exporters' and blue chips' profit outlooks, leading to substantial downward reviews. A strong yen also weighs heavily on the stock market, which has also seen increase volatility since the "Brexit" vote. Endit