TOKYO, Jan 11: Japan’s new government unveiled a $226.5 billion stimulus plan on Friday in the latest bid to boost the world’s number three economy, with plans to rebuild disaster-hit areas and beef up the military.

Japanese investors welcomed the news, with the Nikkei index surging to a 22-month high and the yen tumbling, but some analysts questioned its long-term effect and warned it could lead to more misery further down the line. Prime Minister Shinzo Abe, who came to power in a landslide election victory last month, followed through with one of his key pledges by outlining details of a big-spending plan designed create jobs and end deflation.

“With the measures, we will achieve real GDP growth of two per cent and 600,000 jobs will be created,” he told a briefing.

Japan’s economy shrank by 0.6 per cent in 2011. Last year’s gross domestic product figures are yet to be released. “It is crucially important to break out of prolonged deflation and the high yen,” he added.

A hawkish Abe also repeated his call for Tokyo and the Bank of Japan to “join hands” on driving growth, comments that have stoked tension between him and BoJ chief Masaaki Shirakawa over perceived threats to its independence.

Abe pledged before the election he would press the BoJ to carry out more aggressive monetary easing and warned that if it did not agree to a two per cent inflation target he would change the law.

While the total size of Friday’s package came in at 20.2 trillion yen ($226.5bn), Tokyo’s direct spending on economic stimulus and pension financing amounts to about 13tr yen, with local governments and the private sector kicking in the rest, Abe said. Rebuilding disaster-struck areas, making schools and hospitals earthquake resistant and upgrading ageing infrastructure were among the planned measures.

It will also see 180.5bn yen spent on missiles, fighter jets and helicopters as Tokyo is embroiled in a bitter territorial row with China over a group of islands in the East China Sea. Finance Minister Taro Aso told reporters 7.6tr out of 13tr yen would be financed by new government bonds.

Friday’s stimulus is the latest by successive governments who have tried to lift the economy from years of anaemic growth.

Investors welcomed the move, with the Nikkei up 1.5 per cent to levels not seen since before the March 2011 tsunami. The yen slid to 89.35 against the dollar, a far cry from the exporter-squeezing 75 in late 2011.

But some question whether Japan’s tattered balance sheet, with debt over twice GDP, can bear more debt. Abe insisted the package was not a return to form for his Liberal Democratic Party’s pork-barrelling ways of the last century. “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.

“Fiscal discipline is quite important. However, without a strong economy... we cannot improve our fiscal health.” Masahiko Hashimoto of Daiwa Institute of Research agreed with Abe, saying a flexible fiscal policy in the short-term would eventually be a boost to fiscal health.

But Taro Saito, senior economist at NLI Research Institute, said a package of this size would have a one-time effect.

“But if it fails to ignite a sustained recovery, Japan could fall into a vicious cycle of needing more stimulus,” he said, warning “wasteful spending” could prove problematic.

“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,” he said. Japan slipped into a huge $2.5bn current account deficit in November as exports to China and debt-hit Europe slumped, official data showed on Friday, marking the second-biggest deficit on record after January 2012.

It was also the first time Japan has logged a current account deficit in any month other than January, when trade tends to slow over New Year holidays. —AFP