The Japanese government will spend ¥10.3 trillion (Dh425 billion) to drive the economy from recession in the prime minister Shinzo Abe's first major policy initiative to end deflation and boost growth.
About ¥3.8tn will be for disaster prevention and reconstruction, with ¥3.1tn directed to stimulating private investment and other measures, the cabinet said yesterday. Extra spending will increase GDP by about 2 percentage points and create about 600,000 jobs, the government said.
The stimulus may heighten concern that the government's commitment to fiscal reform is slipping, adding to the risk that a public debt more than twice the size of the economy may trigger a surge in bond yields.
"Abe will probably give the economy more shots in the arm and turn a blind eye to fiscal discipline until the elections," said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. "There's a risk that long-term bond yields will rise unless the government takes measures to restore fiscal health."
A fiscal boost may help Mr Abe maintain support for his Liberal Democratic party before upper house elections in July after the yen slid through 89 per dollar yesterday and as stocks extend a rally.
The Nikkei 225 Stock Average closed 1.4 per cent higher for its ninth week of gains, while the MSCI Asia Pacific Index slipped 0.1 per cent.
Japan's shorter-term bonds rallied while longer-term debt, which is more sensitive to expectations for inflation, declined, widening the yield spread between the 30-year and 5-year securities to the most since March 2010.
The benchmark 10-year note rose, sending the yield down one basis point to 0.8 per cent, the lowest close since December 28.
The stimulus "shows a clear commitment to economic revitalisation," Mr Abe said in Tokyo.
The central bank was also set to adopt the 2 per cent inflation target advocated by Mr Abe, doubling its existing goal of 1 per cent.
The stimulus will "be a big lift for Japan's economy", said Kohei Okazaki, an economist at Nomura Securities in Tokyo. "It will put more pressure on the central bank for easing because the government can push out its chest and say that it's doing what it can."
* Bloomberg News