Stimulus addict Japan gets huge fix from Abe

After 20 years of addiction to stimulus in Japan, some analysts are sceptical about whether the latest $226.5 billion shot in the arm for the sickly economy will offer a permanent cure. Weeks after his landslide election victory, Prime Minister Shinzo Abe on Friday unveiled a massive spending plan that he says will boost flagging GDP by two percentage points and create 600,000 jobs. The package, including a hefty handout for public works projects, is in line with pressure Abe has heaped on the Bank of Japan for aggressive monetary easing which he hopes will halt the local currency's rise and stoke growth. Above all, he wants an end to the damaging spiral of deflation in which Japan has been trapped for much of the last two decades, eroding confidence and hitting investment. So-called 'Abenomics' has found favour with the markets: the yen has slid about 12 percent since the weeks before the general election to trade around 89 to the dollar on Friday. Over the same period the Nikkei 225 has climbed from sub-9,000 to close the week at 10,802, heights not reached in more than two years. The problem, say the doubters, is that Japan has seen this kind of thing before. They fear that once the initial high wears off, the craving for yet more public money will start all over again. There is no doubt a package of this size will have an effect on the economy, said Taro Saito, senior economist at NLI Research Institute. "But if it fails to ignite a sustained recovery, Japan could fall into a vicious cycle of needing more stimulus," he said. "If that is the case, it would only have a negative impact on Japan's fiscal health and a limited effect on boosting the economy." Of the 20.2 trillion yen, around 13 trillion will be direct spending by Tokyo. Local governments and the private sector will make up the difference. Projects to rebuild disaster-stricken areas and make schools and hospitals earthquake-resistant, and shovel-ready plans to upgrade ageing infrastructure will all benefit from the largesse. There will also be cash for initiatives intended to improve the productivity of industry, as well as money for social security and regional revitalisation. But with Japan in hock to the tune of more than double its economy and already running a primary deficit, the 7.6 trillion yen of new government bond issues adds to a precarious pile of debt. The 14th emergency spending programme since 1999, which, according to a Mizuho Securities tally, takes the total spent to 75 trillion yen, is "just more of the same", said Julian Jessop, chief global economist at London-based Capital Economics. "If anything, the measures cast further doubt on the willingness to take tough decisions... and might actually undermine the case for more aggressive monetary easing," he said in a note. Abe's opponents have seized on the cash-for-concrete initiative, which they say amounts to a return to his Liberal Democratic Party's pork-barrelling ways that have left Japan strewn with bridges to nowhere and tunnels nobody needs. The package prompts questions about the rationale behind large spending in rural regions and about the government's ability to prioritise projects and cut waste, said the Nikkei business daily. The prime minister protests that this time, it is different. "There is a suspicion that it is a kind of wasteful spending on white-elephant projects that the LDP did in the past. That's wrong," he said Friday. "Fiscal discipline is quite important. However, without a strong economy... we cannot improve our fiscal health." It is that trade-off of short-term fiscal suffering for long-term economic benefit that Abe is banking on, in the hope that fickle voters can see some results by the upper house elections this summer. Some commentators say it is a bet worth taking. "It is going to be difficult to get out of deflation right away but I think we are heading in the right direction," said Masahiko Hashimoto, economist at Daiwa Institute of Research. "This stimulus package will create demand and put upward pressure on prices," he said.