Japan’s government has revealed a comprehensive plan aimed at mitigating the economic consequences of inflation. The package, which will involve spending more than 17 trillion yen (approximately $113 billion), raises concerns about the country’s already strained finances.
The government intends to fund a portion of this spending through the creation of a supplementary budget for the current fiscal year, amounting to 13.1 trillion yen. When considering spending by local governments and state-backed loans, the total package is estimated at 21.8 trillion yen.
Japan has been grappling with deflation for the past three decades, but this new package signifies an opportunity for the economy to shift into a new stage, according to Prime Minister Fumio Kishida. The plan’s focus is on helping companies increase profitability and revenue to boost wages, thereby ushering in a new era of economic growth.
Key components of the package include temporary reductions in income and residential taxes, financial support for low-income households, and subsidies to alleviate the financial burdens of gasoline and utility bills.
The government estimates that the combined effect of these measures will contribute to an average 1.2% boost in Japan’s gross domestic product (GDP) over the next three years. Notably, gasoline and utility subsidies are expected to bring down overall consumer inflation by about 1.0 percentage point between January and April next year.
Inflation has been persistent, primarily driven by increasing raw material costs, and it has remained above the central bank’s target of 2% for over a year. This has weighed on consumption and complicated the economic recovery that Japan is experiencing, following the impacts of the COVID-19 pandemic.
The rising cost of living has also contributed to a decline in Prime Minister Kishida’s approval ratings, prompting calls for measures to alleviate the financial burden on households.
However, analysts are skeptical about the potential impact of the roughly 5 trillion yen allocated for tax cuts and payouts on consumption and overall economic growth. Takahide Kiuchi, a former Bank of Japan board member and economist at Nomura Research Institute, believes that these measures will only lift GDP by approximately 0.19% for the year, dubbing them “not very cost-effective.”
The package also includes provisions to strengthen supply chains and key technologies. This involves offering tax incentives to companies investing in areas deemed strategically significant.
While the spending is expected to stimulate the economy, it may lead to increased bond issuance and further swell Japan’s already significant public debt, which is double the size of its economy and the largest among major economies.
Despite stellar growth in the second quarter, Japan’s economy is likely to contract in the third quarter due to rising inflation and China’s economic slowdown impacting consumption and exports. Falling real wages in July also cast doubt on the central bank’s projections of a steady economic recovery driven by domestic demand.
