The Japanese Prime Minister's multi-purpose strategy.

(Baonghean) - Japan's massive economic stimulus package, worth over 28 trillion yen (equivalent to 266 billion USD), is expected to help the country cope with the impact of Brexit. But for Prime Minister Shinzo Abe, the value of this stimulus package is even greater than that.

The three goals of Prime Minister Abe's Abenomics policy are: a strong economy, support for families with children to increase the birth rate, and social welfare. Photo: Telegraph.

External factors

The title of "safe haven" that investors have bestowed upon the yen since British voters chose to leave the European Union (EU) is causing concern for the Japanese government.

The reason is that investors are selling off risky assets like stocks to pour money into stable assets like gold, the yen, and the US dollar, causing the yen to appreciate. Meanwhile, this is a crucial point in the three-year economic revitalization plan implemented by the Bank of Japan (BoJ) and Prime Minister Shinzo Abe. The success of boosting the economy through these measures relies heavily on a cheap yen to support businesses that operate and generate revenue overseas.

This has indeed been a challenging task for Tokyo in recent times. The yen had previously held firm above 80 yen to 1 USD. But since the beginning of this year, the currency has appreciated by more than 18% even as the Bank of Japan (BoJ) set negative interest rates for the first time in January.

This poses a significant challenge to Prime Minister Abe's "Abenomics" program, aimed at boosting growth and inflation. However, the British decision is just one of many external events that have a strong impact on Japan. The US Federal Reserve's plan to raise interest rates this year is also a factor driving the yen higher against the dollar.

Many economists believe that the Bank of Japan's current policy has reached its limit and can no longer significantly impact the yen's appreciation amid global market instability. Despite warnings, money continues to flow into safe havens like the yen, a prime example. Therefore, more drastic intervention measures are expected from the Japanese government at this time.

With the announcement of the stimulus package on July 27th, Prime Minister Abe affirmed that Japan's goal with this massive spending is to mitigate the repercussions of the UK's departure. In this support package, the Japanese government plans to increase public spending by an additional 13 trillion yen, primarily investing in infrastructure construction and upgrades, boosting agricultural exports, and promoting tourism products.

The Japan International Cooperation Bank will receive additional funding to provide more low-interest loans to Japanese businesses to cope with the post-Brexit impacts. Tokyo also plans to increase spending to support Japanese companies in building infrastructure overseas.

The economic stimulus package is a new measure to consolidate Prime Minister Abe's political achievements. Photo: Nikkei.

Reviving Abenomics

Brexit presented a favorable opportunity for Japan to push for a robust solution to its struggling economy and bleak future. However, admittedly, this stimulus package aimed at a larger goal: further strengthening the foundations of Prime Minister Abenomics, the economic strategy he has been implementing. This was set against the backdrop of a Japanese economy showing few positive signs, suggesting Abenomics has largely failed.

For example, since the beginning of 2016, when Prime Minister Abe clearly demonstrated his determination to implement the three arrows of this economic policy, economic growth indicators have continued to be unfavorable. Japan's consumer spending and export indices fell in April; manufacturing activity declined sharply, the steepest drop in over three years. The continuous appreciation of the yen due to Brexit further impacted efforts to boost exports, one of the key objectives of Abenomics. Economic stimulus packages were introduced one after another, but the economy remained bleak, especially with no improvement in consumer purchasing power.

This result forced the Abe administration to postpone its consumption tax increase plan for another two and a half years in early June, instead of the previously planned April 2017. This postponement aims to avoid placing an additional burden on consumers and hindering economic growth. Many experts assert that the decision to postpone the tax increase demonstrates the failure of Abenomics.

The strong yen is a hindrance to Abenomics, as well as to the recovery of the Japanese economy. Photo: NPR.

Political leverage

The launch of a massive economic stimulus package, along with the postponement of tax increases two months ago, appears to be stopgap measures amidst the ongoing instability of the Japanese economy.

However, many experts believe that all of this was within Prime Minister Abe's calculations, and that it was even a solution to maintain the balance of power in the political arena. For example, lawmakers from the Komeito party, a partner in Abe's ruling coalition, argue that the proposal to postpone the tax increase for two and a half years is a politically motivated move. If the tax increase plan is delayed until October 2019, by which time elections for the Lower House and local governments at all levels nationwide will have taken place, and Abe will not have to worry about the tax increase affecting the election results.

Some speculate that Abe might even call for an early House of Representatives election to garner voter support and facilitate his economic policies, as well as address other contentious issues facing the government.

But optimists argue that the recent economic stimulus plan should be viewed positively. It needs to be considered alongside the 73 trillion yen in social security spending allocated by the Japanese government in fiscal year 2016. This spending includes increased support for low-income households, expanded childcare services, and support for other healthcare programs that focus on addressing the declining birth rate.

These priorities help address pressing issues in contemporary Japanese society. And, obviously, they amplify and enhance the overall effectiveness of Abenomics solutions.

Thanh Son