PM Abe's plan for $265 billion stimulus puts pressure on BOJ to ease
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Japan's prime minister unveiled a surprisingly large $265 billion stimulus package on Wednesday to reflate the world's third-largest economy, adding pressure on the central bank to match the measures with monetary stimulus later this week.
The earlier-than-expected announcement to boost the flagging economy sent Japanese and other Asian stock markets higher while it weighed on the safe-haven yen, but lacked crucial details on how much of the package would be direct government spending.
The size of the package, at more than 28 trillion yen ($265.30 billion), exceeds initial estimates of around 20 trillion yen and is nearly 6 percent the size of Japan's economy. It will consist of 13 trillion yen in "fiscal measures," which likely includes spending by national and local governments, as well as loan program.
"We need to take steps to support domestic demand and put the economy on a firmer recovery path," Shinzo Abe said in a speech in southern Japan on Wednesday. "I want to use various measures to increase our escape velocity from deflation."
The market expects the Bank of Japan to produce some fire power of its own at its rate review ending on Friday.
In last night’s Audio I discussed the likelihood that the ¥100 represents something of a Rubicon for the Japanese as they decide how next to try and re-instil an inflation bias in economic activity. Today’s announcement of fresh fiscal stimulus is likely to be accompanied by additional measures from the BOJ; in a further iteration of the fiscal/monetary partnership that is the primary attribute of Abenomics.
The response of the Yen to this news has been relatively muted, with traders likely waiting for what the BoJ is going to announce on Friday. Nevertheless, a sustained move below ¥100 would be required to question potential for further Yen weakness.
The Nikkei-225 has been ranging in the region of the trend mean for the last couple of weeks and will need to sustain a move above it to signal a return to demand dominance beyond short-term steadying.