Japan unveils $226.5bn in stimulus

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Japan's new government unveiled a massive $226.5 billion stimulus plan 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 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 percent and 600,000 jobs will be created,” he told a briefing.

Japan's economy shrank by 0.6 percent in 2011, while 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 the him and BoJ chief Masaaki Shirakawa over perceived threats to its independence and policy decisions.

The new premier had pledged before the election that he would press the BoJ to carry out more aggressive monetary easing and warned that if it did not agree to a two percent inflation target he would change the law regarding its remit.

While the total size of Friday's package came in at 20.2

trillion yen ($226.5 billion), Tokyo's direct spending on economic stimulus and pension financing amounts to about 13 trillion yen, with local governments and the private sector kicking in the rest, Abe said.

Rebuilding disaster-struck areas, making more schools and hospitals earthquake resistant, and upgrading ageing infrastructure were among the planned measures.

It will also see 180.5 billion yen spent on missiles, fighter jets and helicopters to beef up the military as Tokyo is embroiled in an increasingly bitter territorial row with China over a group of uninhabited islands in the East China Sea.

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

Investors gave a big thumbs up, with the Nikkei surging 1.5 percent in the afternoon to levels not seen since before the March 2011 quake tsunami.

The yen also tumbled to 89.35 against the dollar, its lowest since June 2010 and a far cry from the record high 75 it hit in late 2011, which hammered exporters.

But the big spending plans have stoked fears over Japan's already tattered fiscal health, the worst among industrial countries with public debt standing at more than twice the size of the economy.

“Huge spending of this size will, of course, have a one-time effect on boosting the economy. But if it fails to ignite a sustained recovery, Japan could fall into a vicious cycle of needing more stimulus spending,” said Taro Saito, senior economist at NLI Research Institute.

Saito also raised fears that some of the money would fall into a black hole of “wasteful spending”.

“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.

Abe, however, insisted the package was not just a return to form for his Liberal Democratic Party (LDP), which has a history during its decades-long domination of what critics say is pork-barrelling, especially in the vote-rich countryside.

“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,” Abe said Friday.

“Fiscal discipline is quite important. However, without a strong economy... we cannot improve our fiscal health.” - Sapa-AFP