TOKYO — Japan’s Cabinet approved today a hefty economic package including 29 trillion yen ($200 billion) in government spending to counter the blow to household budgets from inflation, signaling that the greater concern of its policymakers is that the economy will stall, not overheat.
While central banks around the world are raising interest rates aggressively to try to tame decades-high inflation, with its own inflation rate near 3%, Japan has stuck mainly to using fiscal measures, or government spending, to counter that challenge.
The Bank of Japan underscored that when, wrapping up a policy meeting, it stuck to its longstanding policy of keeping its benchmark interest rate at minus 0.1%.
The Federal Reserve has been aggressively raising borrowing costs to combat chronic inflation, raising interest rates five times this year. It’s set to do so again next week and in December, while warning that the hikes will likely bring higher unemployment and possibly a recession.
In a televised news conference, Prime Minister Fumio Kishida said the overall size of the stimulus package, including private-sector funding and fiscal measures, is expected to amount to 71.6 trillion yen ($490 trillion) and to boost economic growth by 4.6%.
“The economic measures are designed to overcome rising prices and to achieve an economic recovery,” Kishida said in a news conference. “We will protect the people’s lives, jobs and businesses, and strengthen the economy for the future.”
The 29 trillion yen ($200 billion) spending package will be part of a supplementary budget that still must be approved by the parliament. It includes about 45,000 yen ($300) subsidies for household electricity and gas bills and coupons worth 100,000 yen ($680) for women who are pregnant or rearing babies.
Kishida vowed to compile and submit a budget plan and get it approved as soon as possible.
The stimulus package includes subsidies for households that are largely seen as an attempt by Kishida to shore up his sagging popularity. His government has been rocked by the revelation of close ties between the ruling Liberal Democratic Party and the South Korean-based Unification church that surfaced after the assassination of former leader Shinzo Abe in July.
Globally surging prices and a weakening of the yen have amplified costs for Japan’s imports, pushing inflation higher. But its economy grew at a modest 2.2% annual pace in April-June and is forecast to expand at an annual rate of about 1.7% for the year.
Japan’s central bank has kept interest rates near zero for years, trying to raise inflation to a target rate of 2% and spur what it calls a “virtuous cycle” of economic growth by getting consumers and businesses to spend and invest more. Even though prices finally have risen beyond the target, the central bank is forecasting they will again fall. It’s also looking ahead, watching for signs that rate hikes elsewhere might lead to recessions.
By keeping credit so cheap while the Fed is raising rates, the BOJ runs the risk of seeing the yen weaken further. The higher interest rates in the U.S. have led investors to dump other currencies, including the yen, for dollars, driving its value higher.
A weaker yen in turn will raise prices in Japan, since it imports much of what it consumes.
Takahide Kiuchi, an executive economist at Nomura Research Institute in Tokyo, criticized the package for being mainly focused on its huge scale of spending, rather than the quality of spending.
“The bank of Japan’s ultra-easy monetary policy and the government’s fiscal spending expansion create a policy mix that harms market trust in the (Japanese) currency,” Kiuchi said.
The spending package includes: 12.2 trillion yen ($83 billion) to ease the burden of price increases and encourage wage hikes, 4.8 trillion yen ($32.5 billion) for tourism, export promotion and other measures to leverage the weakness of the yen; 6.7 trillion yen ($45 billion) on investments in measures to cope with Japan’s declining population and reduce reliance on fossil fuels and 10.6 trillion yen ($72 billion) in spending on economic and food security and on public works.
Since the outlays will be financed by issuing government bonds, they will further strain Japan’s worsening national debt after heavy spending during the pandemic. Japan now has a long-term debt exceeding 1.2 quadrillion yen ($8.2 trillion), or more than twice the size of its economy.
Kishida said Friday that the government was vigilantly monitoring movements in exchange rates. Japan has spent tens of billions of dollars in market interventions to support the yen in recent weeks as the currency sank to a 32-year low against the dollar of more than 150 yen. On Friday, it was trading near 148 yen to the dollar. At the beginning of the year, it was at about 115 yen.
Any market reaction to another flood of stimulus was likely already taken into account earlier in the week as share prices fell today in Tokyo, with the benchmark Nikkei 225 losing 0.9% to 27,105.20.