Japan’s Record $490bn Stimulus Bucks Global Tapering Trend

Japan’s prime minister, Fumio Kishida, said on Friday he is banking on record fiscal spending to return the world’s third-largest economy to prosperity and counter the devastating effects of the coronavirus pandemic.

Kishida, elected in an October 31 election, is making a courageous move, bucking a global trend towards withdrawing pandemic stimulus measures, but he runs the risk of straining the country’s over-extended finances.

The prime minister told Japanese media that arrangements are being made to convene an extraordinary session of the Diet in early December with the aim of passing a supplementary budget to fund the record-setting 55.7 trillion yen ($490 billion) stimulus.

Cabinet is expected to approve the stimulus package late on Friday. Kishida told reporters that the measure “is enough to deliver a sense of safety and hope to the Japanese people”.

The substantial spending would underscore the resolve of Kishida – once considered a fiscal conservative – to focus on reflating the economy and redistributing wealth to households.

“Though Kishida has been known in the past for being somewhat hawkish, he appears set to continue the Abenomics paradigm for several more years,” said James Brady, an analyst at Teneo, referring to his free-spending predecessor, who was prime minister from 2012 to 2020.

Kishida, who only took office last month, aims to revive a domestic economy that slipped back into contraction in the third quarter.

Four Pillars

The stimulus package is expected to reflect Kishida’s focus on distributing more wealth to households and rests on four pillars:

22.1 trillion yen to ramp up hospital beds and medical supplies
9.2 trillion yen for vaccine development and other steps to prepare for the next wave of pandemic
19.8 trillion yen for cash payouts to households and subsidy to boost domestic chip production
4.6 trillion yen for public works and disaster-relief projects

Of the expected 55.7 trillion yen in total spending, 31.9 trillion yen will be funded by an extra budget to be submitted to parliament this year. The rest will be booked in next year’s state budget.

The government will tap 4.5 trillion yen left over in reserves for emergency pandemic spending, as well as left-over money from previous stimulus packages to fund part of the cost.

Additional Bond Sales

Some analysts and officials say the new package could require Japan to sell additional bonds of around 10 trillion yen.

“The Kishida administration may dangle corporate tax breaks in exchange for wage hikes, which would help consumption,” Mark Haefele, chief investment officer at UBS Wealth Management in New York, said.

Kishida has said he has no plans to change the consumption tax rate from the current 10%.

“Some of the measures we expect as part of the fiscal support package include travel and consumption support, generous cash payouts, and corporate incentives to boost investment in clean energy and digitalisation,” Haefele added.