The Japanese government will spend 10.3 trillion yen ($116 billion) to drive a recovery from a recession, in Prime Minister Shinzo Abe's first major policy initiative to end deflation and boost growth.

Around 3.8 trillion will be for disaster prevention and reconstruction, with 3.1 trillion yen directed to stimulating private investment and other measures, according to a statement released today by the Cabinet Office. The package will increase gross domestic product by about 2 percentage points and create about 600,000 jobs, according to the statement.

A fiscal boost may help Abe maintain support for his Liberal Democratic Party before upper house elections in July as the yen weakens and stocks rally. The extra spending may heighten concerns that the government's commitment to fiscal reform is slipping, adding to the risk that a public debt at more than twice the size of the economy may trigger a surge in bond yields.

"Abe will probably give the economy more shots in the arm and turn a blind eye to fiscal discipline until the elections," saidHiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. "There's a risk that long-term bond yields will rise unless the government takes measures to restore fiscal health."

The government will compile a 13.1 trillion yen extra budget to help pay for the stimulus, according to the statement. The Ministry of Finance told bond investors during meetings yesterday that the extra spending will require additional bond issuance to the market.

Abe has said ending deflation, which weighs on growth by dissuading consumer spending, is the most urgent issue forJapan along with currency strength that hurts exporters. He's aiming to establish a policy accord with the Bank of Japan (8301) to set a 2 percent target for annual consumer price gains, twice the central bank's current goal.

David Fuller's view These are bold measures considering Japan's government debt, and therefore controversial. However, I do not think that Japan has any other sensible choice except to attempt to grow its way out of what has felt like a serial economic decline.

The Nikkei-225 Stock Average has certainly responded favourably to Shinzo Abe's return to power, as Fullermoney has pointed out repeatedly since mid-November 2012.

I maintain that Japan and China are the two most interesting plays among big stock markets, from late last year and probably at least well into 2013. Technically, while they both look temporarily overbought, explosive initial recoveries of this nature which are driven by fundamental change, are usually followed by a slower, longer and more rangy staircase-type advance before eventually spilling over into a more significant reaction and consolidation. Subscribers who are long Japan may wish to remain short the yen for maximum return, at least while it remains in form.