Enlarge imageBy Sumio Ito and Yuko Yoshikawa
TOKYO (Reuters) - Japan's ruling party unveiled a record stimulus plan worth $154 billion (104 billion pounds) or 3.1 percent of nominal GDP on Thursday with the bulk of the money likely to come from new government debt, sending benchmark 10-year bond yields to their highest in nearly five months.
The top government spokesman said 10-11 trillion yen ($100-$110 billion) (67 - 74 billion pounds) in bonds may be needed to pay for Japan's biggest stimulus plan ever as the country battles its deepest recession since World War Two.
Adding to debt issuance of 33.3 trillion yen already planned under the state budget, total new bonds for the fiscal year to March 2010 could reach 44 trillion yen, exceeding the record amount in fiscal 1999.
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With a likely close election due within months the government is under pressure to kickstart the economy as the global crisis has sent exports and corporate profits diving, prompting firms to cut production and lay off thousands of workers.
Details of the plan boosted stocks in companies seen gaining from its green-tinged backing for sales of solar panels and environmentally friendly cars, but economists said the package would leave a hangover.
"The contents look like temporary measures to front-load demand, but they do not pay attention to increasing productivity on the supply side," said Masamichi Adachi, a senior economist at JPMorgan.
"This may contribute to GDP for a year. The consequences over the longer term are negative as we are piling up more of a fiscal burden. Bond issuance will go up from here on."
The plan, released by the ruling Liberal Democratic Party (LDP) ahead of a policy speech by Prime Minister Taro Aso on Thursday, was unlikely to be changed significantly ahead of a formal government announcement on Friday.
Shares in automakers and solar power-related firms jumped as the 15.4 trillion yen plan included expected measures to promote the use of solar panels and fuel-efficient cars.
The package still faces a potentially stormy ride through parliament, where the opposition controls the upper house and can stall legislation and an extra budget to finance it.
Aso has threatened to bring forward an election due by October this year if the opposition delays the package.
BONDS FRET, 'GREEN' STOCKS RISE
The benchmark 10-year yield rose 2.5 basis points to 1.480 percent as details of the package, and the bond issuance needed to pay for it, were reported..
"Extra issuance of around 10 trillion yen is now expected given the size of the stimulus. Not surprisingly, the bond market sees this as bearish news," said Tetsuya Miura, chief fixed-income strategist at Shinko Securities.
Details of the plan showed the LDP pledging more loans for hard-pressed small businesses and subsidies for solar panels and environmentally friendly cars.
Shares in Toyota Motor Corp <7203.T>, maker of the "Prius" hybrid, rose 4.3 percent while those of Mitsubishi Motors Corp <7211.T>, the only mass-volume carmaker with an electric car prototype on the road, climbed 2.1 percent.
Sharp Corp <6753.T>, the world's No.2 maker of solar cells, surged 10.7 percent while Kyocera Corp <6971.T>, the world's No.4 solar cell maker, rose 4.5 percent.
Combined with U.S. plans to help insurers that boosted Wall Street, the news helped lift the benchmark Nikkei share average <.N225> by 3.7 percent. <.T> <.N>
The package will add to spending of 12 trillion yen already planned under previously announced stimulus measures, taking the total stimulus spending to combat the global financial crisis to around 5.5 percent of nominal GDP, or 5.1 percent of real GDP.
The Japanese economy shrank 3.1 percent in October-December from the previous quarter and is expected to have shrunk a further 2.5 percent in January-March.
The contraction is bigger than in other major economies, despite Japan's banking system being among the least damaged by the credit crisis, because of the country's reliance on exports of cars and electronics.
The package came out as data showed Japan's core machinery orders unexpectedly rose in February due to gains in the services sector, in a tentative sign domestic demand may be stabilising.
But analysts warned that the machine orders also showed that Japanese exporters continued to suffer.
Core private-sector machinery orders, a leading indicator of capital spending, rose 1.4 percent in February, the first gain in five months and much better than the expected 6.7 percent slide.
Orders from non-manufacturers rose 3.3 percent but those of manufacturers, hit hard by diving exports, fell 8.1 percent.
($1=99.70 Yen)
(Additional reporting by Leika Kihara, Shinichi Saoshiro and Stanley White; Writing by Rodney Joyce; Editing by Michael Watson)
