(Bloomberg) -- Japanese Prime Minister Shigeru Ishiba is set to unveil a $140 billion economic stimulus package to address a range of challenges from inflation to wage growth, following his election promises to alleviate a cost-of-living crunch.
The package will add up to ¥21.9 trillion, according to documents seen by Bloomberg, a fraction larger than last year’s array of measures. The package will include ¥13.9 trillion of spending from the general account, and ¥0.9 trillion from the special account. Together with private sector spending, the impact of the package overall is expected to be around ¥39 trillion, the documents said.
The proposed plan is expected to be approved by the cabinet Friday, following Ishiba’s return from South America where he attended a series of summit meetings. The compiling of the package with an extra budget to follow are an important test of Ishiba’s ability to proceed with policy now that his ruling coalition only has a minority in parliament.
Still, the extra spending is likely to add to the world’s largest debt load for a developed economy.
The package is set to include support for sustained wage gains and cash handouts for low-income households, as well as investment into the semiconductor and artificial intelligence sector, according to an earlier draft of the plan seen by Bloomberg. The government also said it will resume subsidies for gas and electricity bills from January, to protect households from higher commodity prices.
Around ¥10.4 trillion of fiscal spending will be earmarked for economic growth, ¥4.6 trillion for price-relief measures, and ¥6.9 trillion for efforts related to securing safety, according to the documents seen by Bloomberg Thursday.
The package will also state that annual tax reform discussions for the next fiscal year will include a reference to raising the ceiling for tax-free income from ¥1.03 million, as proposed by the Democratic Party for the People.
Ishiba’s minority government needed to make concessions to the smaller party to ensure funding for the package will get passed in parliament. That means the full cost of the deal to ensure DPP backing will be determined later.
“The figures are roughly within expectations,” said Keisuke Tsuruta, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities. “The key is the tax-free income ceiling, and how much it might be raised.”
If the ceiling is raised to ¥1.78 million as demanded by the DPP, the finance ministry has said the change could cost up to ¥8 trillion in lost tax revenue. A compromise that leaves less of a hole in the government’s tax receipts seems a more likely outcome of the discussions.
Ishiba’s upcoming package, similar in size to last year’s, raises questions about the need for such generous government support amid relatively stable economic growth. In 2023, when former Prime Minister Fumio Kishida unveiled ¥21.8 trillion worth of fiscal spending, Japan’s economy was much weaker.
The economy shrank by the most since the height of the pandemic during the summer as persistent inflation cooled consumer sentiment, partly helping Kishida justify the need for stimulus. In contrast this summer Japan’s economic growth beat consensus estimates, with the expansion driven by fairly solid consumption.
Despite the generous spending, the public reaction toward Kishida’s series of measures were lukewarm, and his approval rate continued to fall amid various scandals.
Japan’s general government debt has grown to a size equivalent to more than 250% of its economy, according to the International Monetary Fund. With the central bank broadly expected to hike interest rates again in either December or January, Japan’s debt-servicing costs are also expected to increase.
“It’s questionable whether Japan needs the same amount of spending as last year,” said Keiji Kanda, senior economist at Daiwa Institute of Research. “If you look at the latest gross domestic product data you can see that consumption has improved quite a bit.”
--With assistance from Go Onomitsu, Ryotaro Nakamaru and Saburo Funabiki.
(Updates with more details, analyst comments.)
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