(Bloomberg) -- Japan’s cabinet approved a stimulus package that’s slightly bigger than last year’s, as Prime Minister Shigeru Ishiba followed up on a pledge to ramp up support for households and businesses struggling to cope with higher costs.
“The most important thing is to raise wages for all generations,” Ishiba told reporters earlier Friday. “This needs to happen now and in the future.”
The stimulus lays out fiscal spending of ¥21.9 trillion ($140 billion) on measures to support sustained wage gains and cash handouts for low-income households, subsidies for gas and electricity bills, and investment into the semiconductor and artificial intelligence sector, according to the cabinet office.
The compiling of the package with an extra budget to follow is an important test of Ishiba’s ability to proceed with policy now that his ruling coalition only has a minority in parliament. Ishiba struck a deal this week with minor opposition party Democratic Party for the People to shore up enough support for his stimulus plan.
The agreement reached over the stimulus package with the DPP provides Ishiba with a template for sustaining his minority government ahead of other looming challenges, including an annual budget for the next fiscal year. After losing its majority in a lower house election on Oct. 27, the ruling coalition needs the votes of at least one of the three largest opposition parties to pass legislation in parliament.
That means the opposition parties now have some leverage to try and get their policy goals implemented, an advantage the DPP used to get the coalition to agree to its demand of raising the cap on tax-free income and include a reference to that in the package in return for its backing for the stimulus.
“It could go horribly wrong at any point for the LDP if the coalition loses the DPP or other alternatives,” said Rintaro Nishimura, a Japan associate at The Asia Group, an advisory firm.
Of the measures laid out in the package, 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 other economic, social and security measures including disaster management.
The overall working size of the package will reach around ¥39 trillion, according to the cabinet office, a figure that relies on projected spending from the private sector. The actual cost of the measures is closer to ¥13.9 trillion, in line with a figure seen by Bloomberg in a draft of the package.
The measures are estimated to boost the nation’s gross domestic product by 1.2 percentage point, according to the Cabinet Office. The government also expects the price relief measures to reduce overall inflation by 0.3 percentage point.
Ishiba and other senior officials in the ruling Liberal Democratic Party have said they are entering a new phase of government in which they will be open to opposition policy ideas.
Tests may come when compromise and agreement are hard to achieve, including over Ishiba’s desire to reach a decision this year on when to raise taxes to secure funds for planned increases in defense spending. None of the main opposition parties have expressed support for such tax hikes.
Nonetheless, the agreement on the stimulus package gives Ishiba a firmer footing after recent opinion polls showing anemic public support for his cabinet. A survey published by public broadcaster NHK this week showed public approval at 41% and disapproval at 37%, relatively poor numbers for a new administration. Ishiba launched a new cabinet lineup on Nov. 11.
Ishiba returned to Japan this week after attending a G-20 leaders meeting in Brazil and an Asia Pacific Economic Cooperation summit in Peru. He missed the leaders “family photo” at APEC and faced some criticism from the public in Japan for not standing up to greet other leaders.
Still, Ishiba held a rare Japan-China summit meeting with President Xi Jinping that appeared to help with a recent thawing of frosty ties. Among positive developments, China plans to re-introduce short-term visa exemptions for Japanese visitors, the Yomiuri newspaper reported on Friday.
Ishiba had also hoped to meet with President-elect Donald Trump en route back from South America but was told Trump wasn’t planning to meet world leaders ahead of his inauguration in January.
Nishimura of the Asia Group said the fundamental question for the LDP is whether Ishiba is the right leader to take the party into an upper house election next July after it lost its majority in the lower house.
“He will need a few big wins diplomatically and politically to secure that confidence,” Nishimura said.
(Updates with more background, developments.)
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