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Lessons from Japan...

The Japanese Prime Minister, Shinzo Abe, launched a new $45 billion stimulus package to boost the struggling Japanese economy. Although Mr. Abe announced a total package of ¥28.1 trillion ($275 billion), the actual new government spending is ¥6.2 trillion ($60.66 billion), of which ¥4.6 trillion ($45 billion) — 0.9 per cent of gross domestic product — will fall in the current fiscal year. The package is mainly focused on welfare and infrastructure spending, as well as to provide support to small and medium-sized corporates that face rising uncertainty due to Brexit.

The timing of the announcement is certainly not accidental nor coincidental. The stimulus comes shortly after the Bank of Japan disappointed markets with a modest addition to its monetary stimulus, raising the pace of equity market purchases to ¥6 trillion per year.

Crucially, policymakers may be gradually coming to terms with the fact that monetary policy has already reached or is close to reaching its limits, and, because of that, expansionary fiscal policies will need to be put in play in order to aid monetary policy in reviving sluggish growth and dormant inflation.