Japan’s current account, which is normally in surplus, swung to a rare and hefty deficit in November, which helped push the yen to a 2-1/2 year low against the dollar and highlighted the need to support the economy as exports weaken.
Abe’s recipe to jolt Japan from years of deflation is big fiscal spending and central bank purchases of government debt but there are risks as the country’s debt burden is already the worst among major economies.
“Bold monetary easing is essential in beating deflation and a strong yen,” Abe said as he unveiled direct spending worth 10.3 trillion yen ($117 billion) on public works incentives for corporate investment and financial aid for small firms.
Taken together with spending by local governments and private-sector firms, the size of the entire package was 20.2 trillion yen ($227 billion) according to government officials.
The government expects the stimulus to raise real economic growth by 2 percentage points and create 600,000 jobs.
Abe has made aggressive monetary policy to end almost 20 years of deflation a top priority after his Liberal Democratic Party (LDP) won elections last month.
“I think the BOJ can respond to Abe’s calls on employment within the existing framework of the BOJ Law by placing a little more emphasis on employment in its forecasts,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo. “But when it comes to inflation, it’s really hard to get consumer prices to rise 2% in the short term. Prices lag the economy by about a year and we’ve been in recession sincelast year.”