Japanese Prime Minister Fumio Kishida has announced a substantial economic relief package, totalling over 17 trillion yen (approximately $113 billion), aimed at mitigating the economic impact of inflation. The measures will include tax cuts among other initiatives.
To finance a portion of this spending, the government plans to create 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 size of the package is estimated to be 21.8 trillion yen.
Kishida noted that Japan’s economy is at a significant juncture, transitioning away from a deflationary trend that has persisted for three decades. The government’s focus is on helping companies enhance their profitability, increase revenue, and raise wages.
In response to rising inflation, driven by higher raw material costs, the government is considering various measures within the package. These measures may encompass temporary cuts to income and residential taxes, as well as subsidies to alleviate the burden of gasoline and utility bills.
Sustained inflation, which has exceeded the central bank’s 2% target for over a year, has impacted consumer spending and posed challenges for an economy still recovering from the aftermath of the COVID-19 pandemic.
Prime Minister Kishida’s approval ratings have declined, partly due to the cost of living pressures, putting pressure on him to implement measures to ease the financial strain on households. He previously stated that the government would offset the impact of rising prices by returning a portion of the expected increase in tax revenues generated by solid economic growth to households.
However, some analysts are skeptical about the effectiveness of the roughly 5 trillion yen allocated for tax cuts and payouts in stimulating consumption and overall economic growth. Takahide Kiuchi, an economist at Nomura Research Institute and a former Bank of Japan board member, expects these measures to have a relatively modest impact on gross domestic product (GDP), raising it by just 0.19% for the year.
Some experts argue that, given Japan’s positive output gap, the economy may not require a stimulus package at this time. While Japan’s economy expanded by an annualised 4.8% in the second quarter, the increasing cost of living and declining real wages have raised concerns about the sustainability of domestic demand as the country continues on its path to economic recovery.