Q+A-How will Japan’s major policies affect the economy?

(For more stories on the Japanese economy click [ID:nECONJP])

By Stanley White and Rie Ishiguro

TOKYO, Nov 26 (BestGrowthStock) – The Japanese government is set
to pass an extra budget with 4.4 trillion yen ($52 billion) in
actual spending to offset a rising yen and persistent deflation.

The Bank of Japan (BOJ) will purchase 5 trillion yen in
assets and keep interest rates virtually at zero until it
forecasts stable prices.

Following are questions and answers about how each policy
works and the likely impact.

HOW WILL THE GOVERNMENT SPEND THE EXTRA BUDGET?

The extra budget, which is for the current year to March
31, will bring forward tax grants to regional governments,
allow local governments to frontload public works spending and
expand subsidies on energy-efficient technology to include
solar panels.

The package will also increase assistance to job seekers
and people raising children, improve health care for the
elderly and support financing for small and medium-sized firms.

WHAT IS THE RATIONALE BEHIND GOVERNMENT SPENDING?

The government will expand subsidies for companies that
hire new graduates and reward companies that offer temporary
workers full-time employment because it wants to lower the
jobless rate among young people.

The jobless rate for people 15 to 24 years old was 8
percent in September.

This is an improvement from 11.1 percent in June, which is
the highest since comparable data became available in 1970.
But this is still worse than the overall jobless rate of 5
percent.

The government is helping small firms, which bear the
burden of yen strength more than large firms, by extending
loan guarantees and subsiding employment at companies where
factory output has taken a hit due to yen gains.

The extra budget will spend money on training healthcare
workers and subsidising environment-friendly technology,
because the government says the demand for these goods and
services is likely to grow and that can support job creation.

WHEN WILL THIS HAVE AN IMPACT AND BY HOW MUCH?

The extra budget has been approved by the lower house and
is set to take effect on Friday even if voted down by the
opposition-controlled upper chamber.

The government has said the extra budget will contribute
0.6 percentage point to gross domestic product. Economists say
a 0.1-0.2 percentage point contribution by the middle of next
year is more realistic.

The size of the package is too small and spread out among
too many spending items to give a $5 trillion economy a boost,
economists say.

Expanding the safety net and offering loan guarantees are
welcome steps, but they don’t immediately translate into GDP
growth, economists say.

The government will expand incentives on purchases of some
energy-efficient goods and frontload public works, but the
economy will slow once the initial boost from these policies
fade, economists say.

HOW WILL THE BOJ’S ASSET BUYING SCHEME WORK?

The 5 trillion yen pool of funds is designed to buy
government debt, exchange-traded funds (ETFs), real estate
investment trusts (REITs) and other assets. The BOJ hopes that
will push down long-term rates, thereby reducing companies’
borrowing costs and spurring capital spending.

The BOJ is expected to use the scheme to ease monetary
policy further if needed, as its key interest rate is already
virtually at zero. The size of the asset buying pool thus
serves as the gauge of the BOJ’s monetary easing.

The BOJ has exempted the scheme from its self-imposed
limit on government bond buying, effectively creating a
loophole that allows it to pump more cash into the economy.
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WHAT IS THE RATIONALE BEHIND BOJ’S ASSET BUYING?

The BOJ’s argument is that since short-term rates are near
zero, it needs to purchase the assets to lower longer-term
rates, spreads over government debt and corporate borrowing
costs.

It also expects its purchases of ETFs and REITs, which it
had never done before, will prompt conservative domestic
players to invest more in these assets and broaden the
investor base.

Governor Masaaki Shirakawa has underscored the
significance of the step by saying that ETFs and REITs carry
risks that are about 13 times greater than U.S. Treasuries of
five- to six-year maturities that are targeted by the Fed’s
latest quantitative easing.

By emphasising the risks, Shirakawa attempted to deflect
criticism that the size of the BOJ’s asset buying is too small
compared with the Fed’s $600 billion bond buying programme.

The BOJ has also explained to the government about the
possibility that it could incur losses from the asset
purchases and may need to reduce its contribution to the state
coffers.

WHEN WILL THIS HAVE AN IMPACT AND BY HOW MUCH?

The BOJ started buying Japanese government bonds and
short-term government bills this month and plans to start
buying corporate bonds, commercial paper, ETFs and REITs in
December.

Many analysts say the size of assets the BOJ will buy is
too small to impact the $5 trillion economy and is unlikely to
be effective in boosting weak domestic spending and investment.

The 3.5 trillion yen the BOJ will spend on government debt
alone is just a fraction of the 908 trillion yen in total
government bonds outstanding and less than a fifth of 21.6
trillion yen in long-term government bonds the BOJ buys
outright each year.

Shirakawa and other members of the central bank’s policy
board have also said it usually takes well over a year for
effects of monetary easing to become visible.
(Editing by Alex Richardson)

($1 = 83.585 Japanese Yen)

Q+A-How will Japan’s major policies affect the economy?