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Japan’s Prime Minister Sanae Takaichi has unveiled a massive ¥21.3tn ($135.4bn) stimulus package designed to spur economic growth and shield households from the rising cost of living.
The package, which has been in the works since Takaichi became prime minister seven weeks ago and marks her first major policy initiative, is Japan’s largest since the Covid pandemic.
It involves gas and electricity subsidies, cash handouts for parents and rice coupons — measures that reflect Takaichi’s efforts to restore the Liberal Democratic party’s electoral fortunes as populist rivals hammer the government’s handling of inflation.
Speculation about the size of the stimulus had triggered heavy selling of the yen and bonds, a sign of investor concern that Takaichi’s bias towards huge government spending would stretch Japan’s finances.
“When Takaichi first became PM, the market thought there was a risk of a Truss moment,” said UBS Japan economist Masamichi Adachi, referring to the market sell-off triggered by former UK prime minister Liz Truss’s budget plans.
“Then that [fear] subsided for a time. Then last week the market started worrying again that the stimulus package would be much bigger than expected.
“What has come out is large, but not so much bigger than last year.”
Adachi said the key for markets would be how much additional bond issuance would be needed to fund the package, which has yet to be finalised.
The package will primarily involve ¥17.7tn of spending and will be backed by a forthcoming supplementary budget, which would be 27 per cent larger than Takaichi’s immediate predecessor secured a year ago. It also involves ¥2.7tn of tax cuts and some funding from the special account.
The stimulus is aimed, in part, at offsetting some of the potential damage to Japan’s export-heavy economy caused by US President Donald Trump’s tariffs. It also aims to boost investment in national security-focused areas such as artificial intelligence and shipbuilding.
Before the cabinet meeting to discuss the plan, finance minister Satsuki Katayama mentioned the option of direct intervention in currency markets, as the yen hovered near levels where the government has previously stepped in to prop up the currency. After cabinet approval of the plan, the yen firmed slightly to reach about ¥157.13 against the US dollar.
The investment managers of several major global funds have voiced fears that Takaichi’s plans for more aggressive fiscal expansion could harm the country’s financial position.
The yen this week tumbled to a 10-month low against the US dollar, while yields on the benchmark 10-year Japanese government bond rose to their highest level since the global financial crisis in 2008. Yields on the 10-year JGB fell 1 basis point to 1.795 per cent after the cabinet approved the plan.
Market volatility around Takaichi’s economic stimulus has been heightened by uncertainty over the likely timing of the next interest rate rise by the Bank of Japan. Takaichi has signalled that she favours a loose monetary policy, a position that has contributed to the recent slide in the yen.
“The government will need to decide whether the weak yen is a political asset or a liability. Undoubtedly it helps exporters [to offset US tariffs], but it is also contributing to real anxiety among consumers,” said Daleep Singh, chief global economist at PGIM Fixed Income.
He added that it was up to Takaichi’s government to decide how to manage the simultaneous pursuit of a looser fiscal policy and a loose monetary policy. “But the market gets to decide too,” said Singh.
