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Japan plans major fiscal easing over deflation

Shinzo Abe, Japan's new prime minister, came out with all guns blazing yesterday as he wrangled an agreement for a policy package that includes "bold monetary easing".

Shinzo Abe, Japan's new prime minister, came out with all guns blazing yesterday as he wrangled an agreement for a policy package that includes "bold monetary easing".

The accord with his coalition ally Natsuo Yamaguchi of the New Komeito Party, announced yesterday in Tokyo, is part of a plan to reach an inflation target of 2 per cent.

The news bolstered the position of Mr Abe's Liberal Democratic Party (LDP) in the lower house of parliament a day before he is poised to take the government's helm and unveil his cabinet.

The New Komeito party had cautioned in the campaign before this month's election that forcing the central bank to reach a 2 per cent inflation target risked undermining its independence. With the incoming coalition now unified on policy objectives, the yen added to a retreat that saw it slide through 85 per dollar yesterday for the first time since April last year.

"[Mr] Abe is proving that his strong words during the campaign were not just rhetoric," said the currency strategists Brown Brothers Harriman & Co.

Mr Abe has called for "unlimited easing" to reach the goal for consumer price increase, and for increased spending on public works.

With New Komeito backing a cornerstone of Mr Abe's economic platform, the LDP is in a better position to campaign for July elections in the upper chamber, where the party lacks a majority.

"If voters get the sense that the economy is improving, he is likely to win in the upper house and he will have a more stable administration," said Harumi Arima, an independent political analyst in Tokyo. The agreement with New Komeito also calls for the extra budget for the current fiscal year to March 2013 and deregulation of the energy, environment and healthcare sectors. The parties agreed to seek nominal GDP growth of 3 per cent, without giving a timeframe for the goal.

The country has been unable to escape the deflation that became entrenched in the late 1990s. Consumer prices excluding fresh food, a benchmark monitored by the central bank, have not advanced 2 per cent for any year since 1997, when a national sales tax was increased.

Last month, the Bank of Japan (BoJ) held off from adding to stimulus having done so in October and September. The bank last week boosted its asset-purchase fund by 10 trillion (Dh429.72 billion), bringing it to 76tn. The facility, which buys assets including government and corporate debt, is the bank's main policy tool to lower borrowing costs as the benchmark interest rate is near zero.

The LDP and New Komeito said they would work to strengthen Japan's alliance with the United States and to secure sufficient funds for the armed forces and coast guard to ensure the defence of Japan's territory, according to yesterday's statement.

Security has been a bone of contention between the partners, with Mr Yamaguchi saying this month any drastic rise in Japan's defence spending would be "undesirable". Mr Abe has said without more resources for defence Japan was at risk of losing control of disputed islands known as Senkaku in Japan and Diaoyu in China.

Incursions by Chinese vessels and an aircraft near the uninhabited islands in the East China Sea have raised tensions in recent months.

It was also announced yesterday that Taro Aso, a former prime minister of Japan, will become the country's sixth finance chief in three years.

"[Mr] Aso's challenge will be to pursue an expansionary fiscal policy without triggering a rise in bond yields," said Mari Iwashita, a bond strategist at SMBC Nikko Securities.

"Mr Abe has said he is confident that Japan can avoid a jump in bond yields even if inflation starts to surge as long as the central bank buys lots of debt," said Azusa Kato, an economist at BNP Paribas in Tokyo.

"But we haven't seen any country that has succeeded in such a challenge."

* with Bloomberg News

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