Japanese Prime Minister Shinzo Abe’s cabinet approved ¥13.5tn ($132bn) in fiscal measures yesterday even as the central bank fought market speculation that it is preparing to put the brakes on monetary stimulus for the world’s third-biggest economy.
The government’s package includes ¥7.5tn in spending by the national and local governments, and earmarks ¥6tn from the Fiscal Investment and Loan Programme, which is not included in the government’s general budget.
But even before the announcement, Japanese government bonds saw their worst sell-off in more than three years as investors feared the Bank of Japan may ratchet back the pace of its aggressive government bond buying.
The BoJ disappointed markets on Friday by keeping bond purchases steady, defying expectations it would hoover up more, and made traders even more nervous after announcing it would re-evaluate policies in September.
Governor Haruhiko Kuroda declined to comment on the spike in JGB yields but said the planned review will not lead the BoJ to weaken its stimulus.
“I don’t think that would happen,” Kuroda told reporters, when asked whether the promised “comprehensive review” might lead to reduced BoJ stimulus.
He spoke after meeting Finance Minister Taro Aso to discuss Abe’s stimulus package.
Kuroda and Aso stressed the importance of concerted government and BoJ efforts to defeat deflation.
Yesterday morning, Abe said “We compiled today a strong economic package draft aimed at carrying out investment for the future.”
“With this package, we’ll proceed to not just stimulate demand but also achieve sustainable economic growth led by private demand.”
The package’s headline figure is ¥28.1tn, but it includes public-private partnerships and other amounts that are not direct government outlays and thus might not give an immediate boost to growth.
Abe last month ordered his government to craft a stimulus plan to revive an economy dogged by weak consumption, despite three years of his “Abenomics” mix of extremely accommodative monetary policy, flexible spending and structural reform promises.
The BoJ’s review has spooked investors, who are unsure how BoJ policy might change.
The price of 10-year JGB futures closed down 0.91 point yesterday to 151.33, and has dropped 2.47 points in the last three sessions – the biggest three-day fall since May 2013.
The expected appointment of Toshihiro Nikai, an advocate of big public works spending, to the No 2 post of Abe’s ruling party in tandem with a cabinet reshuffle on Wednesday underscores Abe’s shift towards his “second arrow” of fiscal policy amid concerns monetary easing is reaching its limits.
Precisely how the spending will be financed is unclear, although the government is considering issuing construction bonds when compiling a supplementary budget later this year.
The stress on fiscal steps is raising doubts about Japan’s ability to fix its already massive debt. The government estimates the stimulus would push up real gross domestic product by around 1.3 % in the near term.
The package will be implemented over several years, officials added.
SMBC Nikko Securities expects the package will push up real GDP growth by just 0.4 percentage point in the year ending March 2017 and 0.04 percentage point the next one.
When public works spending and cash payouts fade late in the fiscal year ending March 2018, Japan “will likely face a fiscal cliff,” said Koya Miyamae, senior economist at SMBC Nikko Securities.
“To prevent a fiscal cliff, the government will likely repeat large-scale stimulus. Considering that a general election must be held by late 2018, direct government spending would become larger, which could further delay Japan’s fiscal consolidation goal.”
The Japanese government will issue several hundred billion yen of 40-year-bonds as soon as September to fund new economic stimulus measures, two people with direct knowledge of the matter said yesterday. The sources spoke to Reuters on condition of anonymity because the plans are not public, after Finance Minister Taro Aso said his ministry would consult with markets on the possibility of issuing more 40-year government bonds.
He dismissed speculation the government would consider issuing 50-year bonds.
The super-long bond sales, adding to ¥2.4tn ($24bn) worth of those planned for that maturity in the fiscal year to March, will be used to fund projects as accelerating construction of maglev train networks, the sources told Reuters. The rail spending is part of ¥13.5tn in fiscal measures approved yesterday by Prime Minister Shinzo Abe’s cabinet to revive the flagging economy, with cash payouts to low-income earners and infrastructure spending.
The government intends to make the utmost use of ultra-low interest rates under the BoJ’s aggressive monetary easing for providing super-long funds to finance infrastructure projects, Aso said.
“While keeping the amount of Japanese government bonds (JGBs) sold to the market at ¥147tn a year, we’ll carefully exchange views with market participants and decide whether to increase super-long JGBs with maturity of 40 years,” he said.
Asked about media reports that the government was considering 50-year bonds, Aso flatly denied such a move. “Newspapers may be considering it, but we are not,” he said.
The dollar strengthened to 101.91 yen after Aso’s remarks on considering increasing 40-year JGB issuance, but his later comments ruling out 50-year bonds weighed on the greenback. Aso’s remarks have further dampened some market players’ hopes for “helicopter money,” in which the government issues perpetual bonds for the BoJ to underwrite debt.
“The government will finance a supplementary budget to fund the stimulus by issuing super-long JGBs.
But it fell short of expectations for helicopter money,” said Hidenori Suezawa, fiscal and markets analyst at SMBC Nikko Securities, referring to the notion of printing money for government debt financing.
“An increase in 40-year bonds, which have already been issued, would mean cuts in JGBs with other maturities on the calendar basis,” he said.