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Japan approves $29 billion stimulus plan, impact in doubt

Japanese Prime Minister, Shinzo Abe.
Fiona Goodall | Getty Images
Japanese Prime Minister, Shinzo Abe.

Japan's government approved on Saturday stimulus spending worth $29 billion aimed at helping the country's lagging regions and households with subsidies, merchandise vouchers and other steps, but analysts are skeptical about how much it can spur growth.

The package, worth 3.5 trillion yen ($29.12 billion) was unveiled two weeks after a massive election victory by Prime Minister Shinzo Abe's ruling coalition gave him a fresh mandate to push through his "Abenomics" stimulus policies. The government said it expects the stimulus plan to boost Japan's gross domestic product (GDP) by 0.7 percent.

Given Japan's dire public finances, the government will avoid fresh debt issuance and fund the package with unspent money from previous budgets and tax revenues that have exceeded budget forecasts due to economic recovery.

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With nationwide local elections planned in April which Abe's ruling bloc must win to cement his grip on power, the package centers on subsidies to regional governments to carry out steps to stimulate private consumption and support small firms.

Of the total, 1.8 trillion yen will be spent on measures such as distributing coupons to buy merchandise, providing low-income households with subsidies for fuel purchases, supporting funding at small firms and reviving regional economies.

Rebuilding after disasters

The remaining 1.7 trillion yen will be used for disaster-prevention and rebuilding disaster-hit areas including those affected by the March 2011 tsunami. Tokyo will also seek to bolster the housing market by lowering the mortgage rates offered by a governmental home-loan agency.

"It's better than doing nothing, but I don't think this stimulus will have a big impact on boosting the economy," said Masaki Kuwahara, a senior economist at Nomura Securities.

"This package directly targets households and regions left behind by Abenomics, so it may work favorably to Abe's ruling coalition in the nationwide local elections."

Read MoreAbenomics gets a mixed report card

Kuwahara said the stimulus is unlikely to spur consumer spending amid uncertainty over the economic outlook, adding that it could push up GDP by just about 0.2 percent.

With little room left for Japan to resort to big fiscal spending, analysts say the government must pin its hope on wage hikes by big companies to play a greater role in bolstering the economy and pulling Japan out of deflation.

The stimulus highlights a tough balance Abe must strike between boosting the economy and curbing runaway debt, which is more than twice the size of GDP, the biggest in the developed world.