It’s becoming clear that another major test of Keynesian theories is underway in Japan.Ever since new Prime Minister Shinzo Abe was elected, the country has seen a basically daily drip of headlines about new stimulus measures, both on the fiscal and monetary policy front.
The latest is a pretty substantial fiscal stimulus.
We will put an end to this shrinking, and aim to build a stronger economy where earnings and incomes can grow,” Mr. Abe told a televised news conference. “For that, the government must first take the initiative to create demand, and boost the entire economy.”
Under the plan, the Japanese government will spend about ¥10.3 trillion, or about $116 billion, on public works and disaster mitigation projects, subsidies for companies that invest in new technology and financial aid to small businesses.
Through these measures the government will seek to raise real economic growth by 2 percentage points and add 600,000 jobs to the economy, Mr. Abe said. The package announced Friday amount to one of the largest spending plans in Japan’s history, he stressed.
As we’ve written a lot about over the last couple of months, Abe’s pro-stimulus stance has resulted in huge financial market moves. The yen has been tanking (which is a feature, not a bug) and the Nikkei has just hit a 23-month high.
On January 22, the Bank of Japan meets, and there are high expectations of a new, aggressive target.
So keep watching this space. If the country starts whirring to life (or if it doesn’t) we’ll have fresh new data about how the government can jumpstart the economy.