Tokyo: Japan’s ruling party unveiled a record $154 billion stimulus plan on Thursday, equivalent to 3.1% of GDP, but with the bulk of the money likely to come from new government debt, benchmark 10-year bond yields hit their highest in nearly five months.
The top government spokesman warned 10-11 trillion yen ($100-$110 billion) in bonds may be needed to pay for Japan’s biggest stimulus plan ever, as the country battles its deepest recession since World War Two.
With a likely-tight election due within months, the government is under pressure to kickstart the economy, as the global crisis has sent exports and corporate profits diving, prompting firms to cut production and lay off thousands of workers.
Details of the plan boosted stocks in companies seen gaining from its green-tinged backing for sales of solar panels and environmentally friendly cars, but economists said the package would come with a hangover.
“The contents look like temporary measures to front-load demand, but they do not pay attention to increasing productivity on the supply side,” said Masamichi Adachi, senior economist at JPMorgan.
“This may contribute to GDP for a year. The consequences over the longer term are negative as we are piling up more of a fiscal burden. Bond issuance will go up from here on.”
The plan, released by the ruling Liberal Democratic Party (LDP) ahead of a policy speech by Prime Minister Taro Aso on Thursday, was unlikely to significantly change ahead of a formal government announcement the next day.
Shares in automakers and solar power-related firms jumped as the 15.4 trillion yen plan included expected measures to promote the use of solar panels and fuel-efficient cars.
The package still faces a potentially stormy ride through parliament, where the opposition controls the upper house and can stall legislation.
Aso has threatened to bring forward an election due by October this year if the opposition stalls the package.
Bonds fret, ‘green’ stocks rise
The benchmark 10-year yield rose 2.5 basis points to 1.480% as details of the package, and the bond issuance needed to pay for it, were issued.
“Extra issuance of around 10 trillion yen is now expected given the size of the stimulus. Not surprisingly, the bond market sees this as bearish news,” said Tetsuya Miura, chief fixed-income strategist at Shinko Securities.
Among the details of the plan, the LDP pledged more loans for hard-pressed small businesses and subsidies for solar panels and environmentally friendly cars. Shares in Toyota Motor Corp, maker of the “Prius” hybrid, rose 2.1 percent while those of Mitsubishi Motors Corp, the only mass-volume carmaker with an electric car prototype on the road, climbed 2.8%.
Sharp Corp, the world’s No.2 maker of solar cells, surged 7.6% while Kyocera Corp, the world’s No.4 solar cell maker, rose 2.6%.
Combined with U.S. plans to help insurers that boosted Wall Street, that helped lift the benchmark Nikkei share average by 2.8%.
The package will add to spending of 12 trillion yen already planned under previously announced stimulus measures, taking the total stimulus spending to combat the global financial crisis to around 5.5% of GDP.
The Japanese economy shrank 3.1% in October-December from the previous quarter and is expected to have shrunk a further 2.5% in January-March.
The contraction is bigger than in other major economies, despite Japan’s banking system being among the least damaged by the credit crisis, because of the country’s reliance on exports of cars and electronics.
The package came out as data showed Japan’s core machinery orders unexpectedly rose in February due to gains in the services sector, in a tentative sign domestic demand may be stabilising.
But analysts warned that the orders also showed that Japanese exporters continued to suffer.
Core private-sector machinery orders, a leading indicator of capital spending, rose 1.4% in February, the first gain in five months and a sharp turnaround from an expected 6.7% slide.
Orders from non-manufacturers rose 3.3% but those of manufacturers, hit hard by diving exports, fell 8.1%.