One down, two to go. Shinzo Abe returned to power in Japan last month having vowed a three-pronged assault on the weak growth and chronic deflation that has dogged the world’s third-largest economy for much of the past two decades.

Step one, the prime minister said, was to push for fiscal stimulus of up to Y10tn ($112bn). On Friday, just over two weeks after the Liberal Democrat leader formally took office, he did just that, unveiling Y10.3tn of fresh spending– a significant boost, when set against the state’s initial budget last year of Y90tn.

“We need to say goodbye to the shrinking economy and aim to achieve a strong economy where innovation and new demand lead to more jobs and income,” said Mr Abe.

The package focuses heavily on infrastructure, including repairs to and construction of quake-resistant roads, bridges and tunnels. It also entails increased investment in reconstruction projects following the March 2011 earthquake and tsunami that devastated parts of northeastern Japan.

Such activities – an old recipe for fast-acting stimulus – could be enough to lift growth in Japan’s real gross domestic product to around 2 per cent this year, say economists, marking a turnround from a likely three consecutive quarters of contraction to the end of last year.

November’s current account figures, also revealed on Friday, showed a much wider than expected Y222bn deficit, underlining the urgency of restoring momentum to an export-led economy still grappling with subdued demand overseas and tense relations with China, its largest trading partner.

But will the stepped-up spending, described by the government as an “emergency stimulus package”, lay the foundations for future growth?

Some are sceptical. Judging by the frequency of such packages – amounting to about Y75tn since 1999 – Japan has been in a permanent state of emergency, says Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo.

“Repairing infrastructure may prevent the loss of economic growth momentum but it cannot actually boost it,” he says, describing such measures as “balm”.

Hiromasa Yonekura, chairman of Keidanren, the powerful business lobby group, says the latest package was “well-timed” given the current weak conditions. But he urged the government to put Japanese businesses on an “equal footing” with global competitors by rebuilding the national energy policy after the nuclear crisis, and by joining negotiations on the Trans-Pacific Partnership, a free-trade bloc, among other “bold” reforms to the framework of industrial policy.

Mr Abe considers such measures to be the third step of his big reflationary push, to be pursued once step two – looser monetary policy from the Bank of Japan – is well under way. He has instructed Akira Amari, a former economy, trade and industry minister, now chair of a panel with the high-sounding aim of “economic revitalisation”, to report back on specific measures by June.

Already, the fall in the yen touched off by hopes of further easing from the BoJ has lifted exporters’ spirits, as it makes their products more competitive overseas.

“We’re beginning to see the light,” Toyota president Akio Toyoda told reporters this week.

And in an encouraging sign of inflationary expectations, the price of gold futures on the Tokyo Commodity Exchange hit an all-time high on Friday.

But for hopes of economic growth to really get embedded, say analysts, people need to see some structural changes.

“It is probably fair to say that to date the first two parts have been pursued more aggressively than the last,” says Masamichi Adachi, senior economist at JPMorgan in Tokyo.

Get alerts on Bank of Japan when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article