Abe Cabinet sets sights on deflation

Abe Cabinet sets sights on deflation

Before officially taking office, newly elected Prime Minister Shinzo Abe succeeded in driving the yen down and boosting stock prices by urging the Bank of Japan to take drastic monetary-easing measures and expressing his stance of active government spending.

The new administration, which aims to take all possible measures to stem the yen's rise and overcome deflation, will compile a new fiscal 2012 supplementary budget and has expressed its intention to intervene into foreign exchange markets if necessary.

However, it remains to be seen whether the policies can be effective, as the government tries to fend off criticism that they are dole-out policies.

Abe told Taro Aso, the finance minister and state minister for financial services, on Wednesday to "proceed with all possible efforts" on behalf of the government to reach a policy accord with the Bank of Japan.

The accord will introduce major changes to the central bank's monetary policies including setting a new inflation target of 2 per cent.

Abe also asked Aso to take such measures as yen-selling and dollar-buying market interventions if necessary, and help the public and private sectors coordinate to establish a system to correct the yen's appreciation.

Reacting favourably to Abe's policy stance of drastic monetary easing and positive finance, the yen's value dropped in Tokyo foreign exchange markets Wednesday.

The former administration led by the Democratic Party of Japan had set a goal of recovering the government's fiscal health by imposing a limit of 44 trillion yen in initial budgets on the issuance of new government bonds.

Abe clarified his stance on additional bond issuance at his Cabinet's first meeting Wednesday evening. Speaking about the fiscal 2012 supplementary budget, Abe said: "I'm not firm on the 44 trillion yen cap. My aim is to compile a large [supplementary budget]."

Aso said at a press conference early Thursday, "I'll make flawless preparations for seamless policy actions" including the compilation of the fiscal 2013 budget.

A draft of the supplementary budget centers on disaster prevention and minimizing disaster damage; strengthening the nation's industrial competitiveness; and giving the public a sense of security.

The Abe administration plans to earmark about 10 trillion yen for government spending in the supplementary budget.

Practical projects to be covered include accelerating reconstruction in areas affected by the 2011 Great East Japan Earthquake, and moving up schedules to repair aging roads, bridges and tunnels.

The draft is also expected to include assistance for improving the fiscal and taxation conditions of small and midsize companies, as well as corporate research and development.

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