Japan approves 3.1 trillion yen extra Budget to cushion Middle East impact

[TOKYO] Japan’s Cabinet approved a US$19.4 billion extra Budget to fund measures meant to cushion households from inflation tied to Middle East turbulence, putting fiscal policy back in the spotlight for bond investors.

Prime Minister Sanae Takaichi’s Cabinet endorsed a 3.1 trillion yen (S$24.8 billion) package that includes a newly created 2.5 trillion yen reserve fund to respond to rising prices for commodities by providing subsidies. While the government has yet to specify the usage of that fund, it is expected to be used initially to cap costs for petrol.

The Cabinet also approved a plan to fund the package that will require new debt financing. Despite the additional borrowing, the government will manage to keep total bond issuance unchanged on a calendar basis, as some debt authorised under last fiscal year’s Budget will be cancelled, the plan showed.

The extra Budget will be submitted to parliament on Wednesday (Jun 3), with passage expected as early as Friday.

Investors are keeping a close eye on Takaichi’s efforts to control the nation’s finances. While it’s common for Japan to compile extra Budgets to cover unexpected costs from natural disasters or provide economic stimulus at some point in the fiscal year, the need for a supplementary Budget barely a month after parliament approved the annual Budget may heighten concerns about the spending trajectory.

Fiscal worries have reverberated through the bond market. Japan’s government bonds suffered a rout last month that saw the benchmark 10-year yield touch a three-decade high due to concerns over inflation, fiscal policy and the Bank of Japan’s gradual approach to raising interest rates. Super-long government bond yields reached records.

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The package also underscores the growing economic impact of prolonged instability in the Middle East. Resource-poor Japan relies heavily on the region for crude oil imports both for fuel and for plastics and other goods produced using petroleum.

Japan’s total government bond issuance for this fiscal year will increase by about 3.1 trillion yen from the original plan to approximately 183.8 trillion yen due to the supplementary Budget. The calendar-based market issuance amount will remain unchanged at 168.5 trillion yen.

To counter Middle East-driven inflation pressures, the government has already announced subsidies for household electricity and gas bills through September, using about 510 billion yen from reserve funds in the current fiscal year Budget. The extra Budget will replenish that pool, increasing available resources to 1 trillion yen. BLOOMBERG