(Bloomberg) -- Japan will lean heavily on extra tax revenue in a ¥13.9 trillion ($92 billion) additional budget to finance Prime Minister Shigeru Ishiba’s stimulus package, according to people familiar with the matter.
The extra budget will partly be funded by ¥3.83 trillion in higher-than-expected tax receipts and unused funds from the previous year, limiting the need for additional bond issuance to ¥6.69 trillion, according to the people. The budget, which is slightly larger than last year’s, may spark questions about the necessity of such extensive spending given recent relatively solid economic growth.
Before unveiling the package, Ishiba had indicated he’ll deliver an extra budget that’s larger than last year’s, in an apparent attempt to bolster his popularity ahead of the general election. This year’s additional budget marginally exceeds former Prime Minister Fumio Kishida’s ¥13.2 trillion plan last year, suggesting Ishiba was trying to spend the minimum amount needed to keep his campaign promise.
Still, the larger extra budget raises questions about necessity. In 2023, when Kishida unveiled his package, Japan’s economy was struggling with its sharpest contraction since the pandemic. This summer, Japan’s economic growth beat consensus estimates, while the Bank of Japan entered a phase of raising rates in March, signaling a measure of confidence in the economy.
The new extra budget will feature ¥5.75 trillion in spending for growing Japan’s economy including its regions, ¥3.39 trillion in response to inflation, and ¥4.79 trillion for security and social policies, according to the people familiar with the matter. ¥490.8 billion will be spent on cash handouts for low-income households, and ¥1.03 trillion set aside for continuing subsidies for gasoline prices, according to Kyodo News. ¥319.4 billion will be used for bringing down electricity and gas costs.
Bloomberg reached out to the Finance Ministry for comment, but hasn’t been able to get a response.
The additional spending will overall add pressure to the country’s already challenging fiscal condition. 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.
The BOJ’s ongoing reduction in bond purchases also introduces uncertainty into the bond market, which will now see more debt being issued when its chief buyer is stepping back. A finance ministry panel earlier this year suggested shifting issuance toward shorter maturities and diversifying JGB investors to fill the void.
During a primary dealer meeting earlier this week, participants recommended reducing 40-year bond issuances due to declining demand from life insurers, while increasing shorter-term maturity bonds.
The government estimates the overall working size of the package will reach around ¥39 trillion, a figure that relies on projected spending from the private sector. These measures are likely to lift the economy by 1.2% annually for the next three years, the cabinet office said.
Ishiba aims to pass the extra budget through parliament by the end of the year. He’s faced more challenges already than his predecessors, as his minority ruling coalition needs to gain the support of at least one opposition party to pass legislation.
--With assistance from Kyoko Shimodoi.
(Updates with more details.)
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