Japan Considers Massive Stimulus Package Amid Rising Prices and Strained Finances
The Japanese government is contemplating a substantial economic stimulus package worth 13.9 trillion yen ($89.7 billion) to alleviate the burden of rising prices on households. This proposed spending surpasses the 13.2 trillion yen allocated for last year's stimulus, further straining the nation's already burdened public finances.
The package includes approximately 8 trillion yen for government investment and lending, along with local government spending. When private funding is factored in, the total package reaches 39 trillion yen. The government plans to distribute 30,000 yen ($193) to low-income households exempt from residential taxes and 20,000 yen per child for families with children.
The ruling coalition and a key opposition party reached an agreement on the draft package, clearing major hurdles. However, concerns remain regarding the necessity of such a large package, given signs of private consumption recovery and positive real wage growth. Additionally, achieving a primary budget surplus in the next fiscal year appears increasingly unlikely.
The government previously estimated a primary budget surplus of 0.8 billion yen in fiscal 2025, but the proposed stimulus package jeopardizes this goal. Japan has relied on supplementary budgets, typically worth a few trillion yen, for one-off emergency spending. However, the size of these budgets has ballooned since 2020, with nearly 9 trillion yen of last year's 13-trillion-yen spending funded by new debt.
The scale of new bonds required for the proposed package remains unclear. The International Monetary Fund has urged Japan to fund any additional spending within its budget rather than issuing more debt, emphasizing the need for fiscal consolidation as the Bank of Japan shifts away from its long-standing stimulus program.
With the monetary policy shift, the government can no longer rely on ultra-low borrowing costs and the central bank to effectively manage debt. The Finance Ministry has set the assumed interest rate for the year starting next April at 2.1%, increasing debt-servicing costs for interest payments and debt redemption.