I can’t say this was unexpected, as Abe indicated he’d do this during the campaign:
Japan’s $117 billion economic stimulus package is a positive start to revive a frail economy. But the government needs to follow this up with long term structural changes and the central bank has to chip in with some bold moves – otherwise disappointment is sure to follow, analysts said Friday.
Faced with an economy in recession, Japan’s new government unveiled the country’s biggest spending boost since the financial crisis and one it hopes will boost economic growth by 2 percentage points and create 600,000 jobs.
Japan’s economy, the world’s third largest, has contracted for two quarters running, pushed into a recession by weak global demand for its exports.
“Japan’s economy has been very weak over the past couple of quarters and some stimulus is necessary to get the growth rate up at least over the near term,” Thomas Byrne, senior vice president at Sovereign Risk Group, Moody’s Investors Service, told CNBC Asia’s “The Call.” “Other things are necessary to keep the growth rate up over the longer-term though.”
Shinzo Abe, who became Japan’s new prime minister last month after his Liberal Democratic Party was returned to power with a comfortable election win, has promised to revive the economy and urged the central bank to introduce aggressive monetary easing and double its inflation target to 2 percent.
(Read More: Bank of Japan to Consider Easing Again in January)
But analysts said that Friday’s stimulus measures are likely to have only a short-term boost and should be just the start of steps needed to really kick start the Japanese economy.
“The latest package is big and I expect there would be a bigger bump to growth, but I would also expect that it would have the same short-lived impact as past stimulus and growth would fall back,” said Tim Condon, head of research, Asia ING Financial Markets in Singapore.
“I would be much more positive if the Bank of Japan (BOJ) says it agrees with Mr Abe and that it is going to change the way it does do monetary policy and become much more accommodative,” he added.
The expectation of aggressive monetary easing and a much bolder BOJ since Abe, who was prime minister in 2006-2007, returned to power has sparked a bull run in Japanese markets.
But nonetheless very disappointing. Obviously fiscal stimulus hasn’t worked in the past. Japan has run massive budget deficits, producing a mindbogglingly large national debt, and has seen NGDP fall for 20 years—perhaps the worst long term aggregate demand performance by a developed country in recorded history. That’s right, the worst—and in a country where the national debt has soared to over 200% of GDP. When you have a central bank that repeatedly raises interest rates during a period where (GDP deflator) inflation is negative, you aren’t going to get any “ooomph” from deficit spending.