TOKYO: 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 ($265.30bn), exceeds initial estimates of around 20tr yen and is nearly 6 per cent the size of Japan’s economy. It will consist of 13tr yen in “fiscal measures,” which likely includes spending by national and local governments, as well as loan programmes.

“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. “The amount is so large that the stimulus package is bound to have a big economic impact. It is impossible to spend this much money in one extra budget, so this may take place over the next few years,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“The BoJ is likely to ease policy, including increasing government debt purchases, so you could say the BoJ can absorb the new debt. It also makes it easier to show that the BoJ and the government are working together.” Many BoJ policymakers prefer to hold off on easing as they expect the fiscal stimulus package to boost growth and brighten the prospects for hitting their 2pc inflation target.

But yen moves and political considerations could be decisive factors for the BoJ policymakers agonising over whether to expand stimulus or to save their dwindling policy resources for when the economy takes a turn for the worse.

Japan’s Nikkei stock average rose nearly 2pc on the larger-than-expected stimulus package, while the yen slumped against the dollar.

Published in Dawn, July 28th, 2016