Japan approves 21.3 trillion yen stimulus to mitigate inflation pain
The biggest portion will go to price relief, totalling 11.7 trillion yen
[TOKYO] Japanese Prime Minister Sanae Takaichi’s Cabinet approved a 21.3 trillion yen (S$177 billion) economic stimulus package on Friday (Nov 21), marking the first major policy initiative under the new leader, who has pledged to pursue expansionary fiscal measures.
The stimulus plan includes 17.7 trillion yen in general account spending, the Cabinet Office said on Friday. Those outlays would likely be funded via an extra budget, and they mark a 27 per cent jump over what her predecessor rolled out a year ago.
The biggest portion will go to price relief, totalling 11.7 trillion yen. That includes provisions to dole out 7,000 yen in subsidies for gas and electricity bills for each household over three months to March, a one-off 20,000 yen cash handout per child and two trillion yen in funds to aid regions.
That includes a provision to dole out 7,000 yen in subsidies for gas and electricity bills for each household over three months, to March at a cost to the government of 500 billion yen. Takaichi will also spend 400 billion yen for 20,000 yen cash handouts per child and two trillion yen in funds to aid regions.
“The initial amount they’d set aside was already large, but towards the end we could see the kind of process unique to a minority government, where they had to factor in opposition parties’ cooperation,” said Saori Tsuiki, senior economist at Mizuho Research & Technologies. “If the larger amount sends an unintended message to markets or overseas and ends up adding to yen-weakness risks, we may have to discount the expected economic impact of the package.”
The sizeable allocation for price relief highlights Takaichi’s commitment to tackling persistent inflation, which has fuelled voter frustration and contributed to the ouster of her predecessors. Data on Friday showed that Japan’s key price gauge has stayed at or above the Bank of Japan’s 2 per cent target for 43 straight months, marking the longest such stretch since 1992.
Among other measures to counter inflation, about one trillion yen was set aside to abolish the petrol tax, a measure first proposed by opposition parties, including the Liberal Democratic Party’s new junior coalition partner Ishin. Raising the income tax-free threshold, another idea originally from opposition parties, was also adopted, costing 1.2 trillion yen.
These price measures together are expected to push down the overall inflation gauge by an average of 0.7 percentage point from February to April, according to the Cabinet Office.
The package includes 1.7 trillion yen to strengthen defence and diplomatic capabilities, with 1.1 trillion yen allocated to help raise defence spending to 2 per cent of gross domestic product this fiscal year after Takaichi moved the targeted timeline forward by two years. Another 7.2 trillion yen will be allocated for investment related to crisis management.
Takaichi earmarked 700 billion yen in reserve funds to address damage caused by natural disasters and incidents caused by bears.
Public support for Takaichi’s Cabinet so far remains strong, according to local polls. An ANN survey conducted last weekend showed her approval rate rising 8.8 points to 67.5 per cent, with a majority of respondents expressing hopes over her economic package.
Bond issuance will likely exceed last year’s levels, according to people with knowledge of the matter. Concerns over rising debt pushed yields on five- and 10-year government bonds to their highest since 2008 earlier this week, while longer-dated yields climbed further. The yen weakened past 157 per US dollar, its softest since January, prompting verbal warnings from senior officials.
“It is clear that Japan will face higher spending pressure on social security, interest payment and national defence for some time,” said Rain Yin, sovereign analyst at S&P Global Ratings. “However, our sovereign rating on Japan has already factored in Japan’s longstanding weakness in the fiscal balance and its extremely high government debt burden. This assessment is unlikely to worsen substantially from further weakening at the margin.”
The government estimates that the package will lift the nation’s GDP by an average of about 1.4 percentage points per year on an annualised basis for three years, assuming the measures take effect during that span, the government said. The economy posted its first contraction in six quarters in the July to September period, partly due to the US tariff impact.
On that note, the economic package pledges to strengthen the financial foundations of the Japan Bank for International Cooperation and Nippon Export and Investment Insurance to ensure the implementation of a US$550 billion investment fund that was a key part of the Japan-US tariff agreement.
It also says it will explore new funding sources to invest in sectors critical to economic security, such as shipbuilding, quantum technology and critical minerals. BLOOMBERG, REUTERS
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