Bank of Japan and Shinzo Abe prepare for next round of stimulus in fight for growth

Jake Cordell
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Shinzo Abe, not yet ready to go home, will be going big on a summer stimulus
Shinzo Abe, not yet ready to go home, will be going big on a summer stimulus (Source: Getty)

Japan's policymakers are gearing up to unleash a new round of massive economic stimulus over the next few weeks in a push to bust the economy out of its low-growth low-inflation malaise.

The action will get underway this week in a crunch central bank meeting where markets expect the Bank of Japan (BoJ) to deliver on the next round of monetary expansion, and will be followed up next week by the unveiling of a new government spending package by Prime Minister Shinzo Abe.

The Bank is currently pumping ¥80 trillion (£584bn) a year into the economy through its quantitative easing programme and has a base interest rate of minus 0.1 per cent. Markets expect the size of asset purchases to be ramped up to ¥90 trillion along with serious discussions to be had about chopping interest rates even further into negative territory.

Governor Haruhiko Kuroda has appeared to rule out more extreme moves such as helicopter money, but Societe Generale's Takuji Aida said he expects action on both the quantity and quality of bonds bought by the BoJ along with an interest rate cut. "If any one of the three dimensions is not used, the markets will take that as a sign the policy option has reached its limits," he warned.

Capital Economics also said it expected interest rates to sink to minus 0.3 per cent at the start of a sustained period of loosening over the rest of the year.

However, the BoJ has disappointed before. In June it was expected to unlock more easing, with talk of annual asset purchases hitting ¥100 trillion, but decided to hold off until after UK voters had headed to the polls in the EU referendum.

Read more: Japan has axed its GDP forecast for 2016

"The financial markets will be waiting for major fireworks from the BoJ, which may or may not materialise," said analysts at Bank of America Merrill Lynch.

The government is less likely to miss the opportunity to act. A report in this morning's Nikkei paper said the government was preparing a ¥6 trillion fiscal stimulus package - double the level previously anticipated. Societe Generale's Aida said Abe had been reinvigorated by election results earlier this month which have been interpreted as a vote of confidence in his Abenomics programme, despite mixed results.

The newspaper said details of the government's spending spree could be announced next week, with the total package including government-backed loans for business to promote investment to top ¥20 trillion.

Although Japan has avoided falling back into a technical recession since 2014, in two of the last four quarters the economy contracted, prompting Abe to announce a string of delays regarding the implementation of a new consumption tax.

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