Tokyo: Japanese prime minister Shinzo Abe said his government would compile a stimulus package of more than $265 billion next week to reflate the flagging economy, although it was unclear how much would be spent to directly boost growth.

The size of the package, at ¥28 trillion ($265.30 billion), exceeds initial estimates of around ¥20 trillion and is nearly 6% the size of Japan’s economy. It will consist of ¥13 trillion in “fiscal measures," which likely includes spending by national and local governments, as well as loan programmes.

“We need to take steps to support domestic demand and put the economy on a firmer recovery path," Abe said in a speech in southern Japan on Wednesday. “I want to use various measures to increase our escape velocity from deflation."

Abe’s announcement came earlier than expected and pressures the Bank of Japan (BoJ) to match his big spending plan with additional monetary easing at its rate review ending on Friday.

“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," said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“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."

Many BoJ policy makers prefer to hold off on easing as they expect the fiscal stimulus package to boost growth and brighten the prospects for hitting their 2% inflation target.

But yen moves and political considerations could be decisive factors for the BoJ policy makers agonizing over whether to expand stimulus or to save their dwindling policy resources for when the economy takes a turn for the worse.

Japan’s Nikkei stock average rose nearly 2% on the larger-than-expected stimulus package, while the yen slumped against the dollar.

No lasting impact?

Abe order his government earlier this month to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his “Abenomics" mix of hyper-easy monetary policy, big spending and structural reforms.

Sources told Reuters the package would have a headline figure of at least ¥20 trillion. Only about ¥9 trillion was to come from a combination of direct spending from both national and local governments and loan programmes.

Such “fiscal spending" appeared to have increased to ¥13 trillion. But the rest is likely to come from state subsidies to private firms and lending from quasi-government entities, which does not involve direct government spending and thus may not give an immediate boost to growth, analysts say.

Abe’s administration has also offered few hints on how it will finance the package, casting doubts on Japan’s ability to fix its tattered finances.

Sources have signalled the package will be funded in state budgets spawning several years. The government is considering issuing construction bonds but remains cautious about resorting to large-scale debt issuance.

Japan’s finance ministry denied a media report it was considering issuing 50-year government bonds for the first time to capitalize on ultra-low interest rates.

While Abe may have succeeded in giving stocks a temporary boost, some analysts have doubts the impact will last.

“Markets are used to this size of stimulus, so their reaction is neutral," said Kyohei Morita, chief Japan economist at Barclays Capital. “The effectiveness of the stimulus package itself is questionable." Reuters

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