Japan Approves $29 Billion Spending Package to Boost Economy

Japan’s government approved a 3.5 trillion yen ($29 billion) fiscal stimulus package to boost the economy after April’s sales tax hike caused consumption to slump.

The measures include shopping vouchers, subsidized heating fuel for the poor and low interest loans for small businesses hurt by rising input costs, and will boost gross domestic product by 0.7 percent, the government estimates. The spending will be paid for with tax revenue and unspent funds and won’t need new bond issuance, Economy Minister Akira Amari said today in Tokyo.

Unexpected falls in output and retail sales in November underscore the continued weakness in the economy. With little sign of a rebound in domestic demand, getting growth back on a recovery track is a priority for Prime Minister Shinzo Abe.

“This will support private consumption and boost regional economies, so that the virtuous economic cycle spreads to all corners of the nation,” Abe said in Tokyo after the decision.

About 1.7 trillion yen will be spent on public works in areas damaged by natural disasters and to improve disaster preparedness, with 600 billion yen for revitalizing regional economies and 1.2 trillion yen to support people and small businesses hurt by the current economic situation, according to documents released by the Cabinet Office.

Extra Budget

The package is part of an extra budget for the fiscal year through March which will be adopted by the cabinet on Jan. 9, Finance Minister Taro Aso said in Tokyo today. The budget then needs to be approved by parliament, which is controlled by the ruling coalition.

Abe last month delayed the planned further hike in the sales tax by 18 months after data showed the economy fell into recession. GDP (JGDPAGDP) shrank an annualized 1.9 percent last quarter, more than initially estimated, after a 6.7 percent contraction in the three months from April, when the levy was raised for the first time since 1997.

The postponement fueled concern about the government’s effort to rein in the world’s heaviest debt and prompted Moody’s Investors Service to cut its credit rating on Japan.

“Coupled with the delay of the sales tax hike, the package will be large enough to stimulate consumption ,” Hidenori Suezawa, a financial-market and fiscal analyst at SMBC Nikko Securities Inc. in Tokyo, said before the announcement. “Rising tax revenue will be of some help in reining in debt but the government’s fiscal policies are making it harder to consolidate their finances.”

The Bank of Japan expanded its already unprecedented monetary easing in October, aiming to pre-empt any risk of a delay in ending Japan’s “deflationary mindset.” A decline in demand following the tax increase and a drop in oil prices put downward pressure on prices, the bank said.

Source: Bloomberg