The government has structured the initiative in a way that will see the larger portion going to the sector for disaster management and reconstruction, which accounts for 3.8 trillion yen. The other part of this budget will be promoting the private sector. The private sector investment will be granted 3.1 trillion Yen, out of the total 10.3 trillion Yen. The budget is aiming at increasing the Gross domestic product (GDP) by over 2% and boosting the job sector through the creation of 600000 jobs.
What are the possible effects of this economic stimulus?
Contrary to China's inflation pick-up, Japan, one of Asia's biggest economies is recording a negative growth rate. The newly elected Prime Minister must reorganize the strategies in a way that will fully convince the citizens of Japan about the economic stability of their nation. Mr Abe has to lead the way and organize the country's priorities to rescue the country from its third economic recession that has persisted for over five years. He has planned for this economic stimulus to restore the stability of the Japanese economy. The government's focus on fiscal reform may fail as a result of the planned economic stimulus program. Additionally, this stimulus will increase the public debt by about twice the country's GDP which could be disastrous and prompt a surge in bond yields.
Implications for bond yields
Japans shorter-term bonds have recovered well, but the longer term bonds which are naturally very sensitive to inflation have recorded a decline resulting in a significant widening of the yield spread compared to the 30 year bond, this is the greatest yield spread recorded since March 2010. Also, the 10-year benchmark note has recorded a rise, lowering the yield by one basis point to 0.81 percentage points, becoming the lowest close since Dec 28. According to Abe, the stimulus contains solemn engagements to revive the Japanese economy. The Japanese central government has been obligated to accept and adopt the 2% inflation target proposed by the Prime Minister, doubling its current goal of 1%, but has not set any deadline for implementing the target or achieving it.
This stimulus will be a significant boost to the economy of Japan
According to Mr Robert Barkley, Executive Vice President of Portfolio Management with Tokyo based Orix Trading, the economic stimulus will be create a surge in Japans economy.
According to Mr Barkley’s analysis, he predicts that economic growth will result from this incentive, stating that the government's authority over the Central Bank will ensure that this initiative runs smoothly and successfully with the overall goal of improving economic growth in the least time possible.
Who will cater for this huge budget?
According to Mr Barkley, the challenges facing the newly elected Prime Minister are a significant current account deficit. The government has organized an extra 13.1 trillion Yen budget, with at least some of the funding expected to come from the sale of 5 trillion Yen bonds. Other bond issuances for this fiscal year amount to 8 trillion Yen, including a previous plan to sell 2.6 trillion Yen bridge bonds aimed at covering pensions.
In an earlier report by Mr Barkley, he says that the extra budget will help Japan realize an annualized growth in GDP of approximately 3.5% during the second quarter of this year and his company has raised it's GDP forecast from 1 to 1.8% attributing this to the impacts of the stimulus program, improved gains from exports and the recovery in the Yen.
Source: Mr Robert Barkley, Executive Vice President of Portfolio Management with Tokyo based Orix Capital Trading
Contact: https://orixtrading.com
