Prime Minister Shinzo Abe, a hawk who came to power last month on a pledge to reverse Japan’s fading fortunes and get tough on diplomacy in the face of tensions with China, outlined details of the budget at a Tokyo press briefing.
Abe said the package was designed to stir Japan’s lumbering economy and create 600,000 new jobs as well as dragging the country out of chronic deflation that has haunted the world’s third-largest economy for years.
Japan’s economy shrank by 0.6 percent in 2011. Last year’s gross domestic product figures have not yet been released.
“With the measures, we will achieve real GDP growth of two percent and 600,000 jobs created,” Abe told the briefing.
“It is crucially important to break out of prolonged deflation and the high yen.”
About 13.1 trillion yen of the 20.2 trillion yen ($226.5 billion) package would be financed by Tokyo for economic stimulus and public pension financing, with the remainder covered by local governments and the private sector.
Rebuilding disaster-struck areas, making more schools and hospitals earthquake resistant, and upgrading ageing infrastructure were among the planned measures.
Abe also repeated a call for Tokyo and the Bank of Japan (BoJ) to “join hands” on driving growth, comments that have stoked tension between the new leader and BoJ chief Masaaki Shirakawa over perceived threats to the central bank’s independence and policy decisions.
The surging Japanese currency, which hit record highs around 75 against the dollar in late 2011, hammered the country’s exporters by making their products less competitive overseas.
The foreign exchange dilemma came as Japan was already struggling to cement a recovery after the 2011 quake-tsunami disaster and slowing demand in key export markets including debt-hit Europe.
But the yen has been tumbling in recent weeks as speculation ramps up that the BoJ will respond to Abe’s wishes with more aggressive monetary easing.
On Friday, the yen plunged again, hitting a more than two-year low against the dollar while the benchmark Nikkei 225 stock index soared 1.20 percent in morning trade on hopes the new government’s policies will help growth.
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.
Abe, however, insisted the package was not just a return to form to his Liberal Democratic Party (LDP), which has a history of turning on the fiscal taps especially in vote-rich rural areas, and is dismissed by critics as pork-barrelling.
The LDP ruled Japan for most of the past six decades, a streak last broken in 2009 when the rival Democratic Party of Japan (DPJ) swept to power. The DPJ was booted out in December general elections.
“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 fiscal health.”
Tokyo is also planning to spend a relatively small 180.5 billion yen on missiles, fighter jets and helicopters to beef up Japan’s military.
It comes as Japan is embroiled in an increasingly bitter territorial row with China over a group of uninhabited islands in the East China Sea and fears about an unpredictable North Korea, which sent a rocket over Japan’s southern islands last month.
Beijing has sent vessels to the area dozens of times since — most recently on Monday — and late last year dispatched a plane in what was the first ever intrusion into Japanese airspace by its sometimes hostile neighbour.