Japan To Spend $113 billion To Cushion Inflation

Japanese Prime Minister Fumio Kishida said on Thursday the government will spend over 17 trillion yen ($113 billion) on a package of measures to cushion the economic blow from inflation, which will include tax cuts.

To fund part of the spending, the government will compile a supplementary budget for the current fiscal year of 13.1 trillion yen, Kishida told reporters.

Including spending by local governments and state-backed loans, the size of the package will total 21.8 trillion yen.

“Japan’s economy is seeing a big opportunity open up to shift to a new stage for the first time in three decades,” as it exits from a deflationary spiral, Kishida told a meeting of government and ruling party executives on Thursday.

“That’s why we need to help companies boost profitability and earn revenues to boost wages,” he said.

Reuters reported on Wednesday the government is considering spending more than 17 trillion yen for the package, which will include temporary cuts to income and residential taxes as well as subsidies to curb gasoline and utility bills.

Inflation, fuelled by rising costs of raw materials, has kept above the central bank’s target of 2% for more than a year, weighing on consumption and clouding the outlook for an economy making a delayed recovery from scars left by COVID-19.

The rising cost of living is partly blamed for pushing down Kishida’s approval ratings, piling pressure on the prime minister to take steps to ease the pain on households.

With increases in wages proving too slow to offset rising prices, Kishida had said the government will cushion the blow by returning to households some of the expected increase in tax revenues generated by solid economic growth.

Analysts, however, doubt whether the roughly 5 trillion yen to be spent on tax cuts and payouts would do much to boost consumption and Japan’s economic growth.

Takahide Kiuchi, a former Bank of Japan board member who is currently an economist at Nomura Research Institute, expects the measures to lift gross domestic product (GDP) by just 0.19% for the year.

“It’s a policy that isn’t very cost effective,” he said. “With Japan’s output gap having turned positive in April-June, the economy doesn’t need a stimulus package in the first place.”

Japan’s economy expanded an annualised 4.8% in the second quarter, the biggest increase in more than two years, as an end to COVID-19 pandemic curbs boosted consumption. But falling real wages in July adds to doubts over central bank projections that domestic demand can keep the country on a steady recovery path.