Japan’s new $490 billion stimulus package

Written by By Tiffany Ap, CNN

With a $490 billion stimulus package in place , Japan’s government is hopeful it will ignite a resumption of growth.

As the economic recovery from a recession in the early 2000s stalls and inflation is creeping up slowly, Prime Minister Shinzo Abe sees the “Abenomics” program as the way to finally get the Japanese economy running again.

The package, which was approved on January 23, could help fund a number of infrastructure projects, including high-speed trains linking cities across the country.

The projects will also be structured to prevent the money from being used for consumption tax hikes set to take place later this year.

“To an extent, the program is likely to be deflationary, as spending on tax cuts and new infrastructure will depress profits and consumer spending, thereby weakening the economy,” says Jim O’Neill, the Chairman of Goldman Sachs Asset Management.

“It is also likely to encourage private investment, but only slightly, because it is designed to stop the consumption tax from rising.”

The program will lead to an expected loss of government revenue, which the government will need to finance the spending over a long-term period. This could prove tricky because Japan has already been living beyond its means, and its gross debt burden is the second highest in the world.

The ‘most important day of my life’

Abe pledged to his center-right Liberal Democratic Party, which is at the helm of the coalition government, at the weekend that the package “will be the most important day of my life.”

Abenomics, introduced in 2012, was designed to stoke the Japanese economy and bring the country out of the economic doldrums after a “lost decade” in the early 2000s.

The plan was to stimulate consumption, implement a “maximum value-added tax” rise and boost exports, while boosting public investment.

The monetary and fiscal stimulus plan has had mixed results, however.

While consumption has returned and exports have picked up a little, inflation is still stubbornly low and investment by companies is failing to keep pace with population growth.

The government’s decision to not raise taxes this year could instead push the debt burden up, and further damage the Japanese economy.

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