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Prime Minister Shigeru Ishiba’s newly formed government has approved a $250bn economic stimulus package aimed at giving Japan a “sense of well-being” as households battle rising prices and the country adjusts to the idea of living with inflation.
The giant stimulus plan, which features support for the AI and semiconductor industries along with cash handouts and energy subsidies for low-income households, comes as financial markets are increasingly confident that the Bank of Japan will raise interest rates at its meeting in December.
The scale of the package, and the debate about its necessity, will now be the main focus of the supplementary budget draft that will be submitted to an extraordinary parliamentary session that will take place this week.
The package in its current form includes a large and potentially transformative increase in the minimum wage threshold for income tax from the current $6,640 – a level that has not changed for 29 years and which critics claim has reduced part of the population from joining. workforce.
By setting the threshold to $11,500, argue its supporters, many Japanese – especially women – who currently work and whose incomes fall below the income tax trigger level will work longer, earn more and consequently increase their disposable income. an economy facing long-term pressures from a shrinking and aging population.
Critically, the income tax plan is a signature initiative of the small opposition party – the Democratic People’s Party – which is currently dependent on the Ishiba government. Including these policies, analysts say, highlights the fragility of the new prime minister’s position and the forced dependence on populist initiatives.
“The most important thing is to raise wages for all generations,” Ishiba told reporters on Friday, before the stimulus package was approved by the Cabinet Office.
The DPP’s proposal has sparked fierce debate within the ruling coalition and beyond, particularly as tax revenue will drop by around $45bn under the new threshold, according to government estimates. Critics see the idea as reckless fiscal expansion, and a source of greater income inequality. Others fear that it could lead to a rapid rise in inflation.
Ishiba is the latest Japanese prime minister to make wage growth a focus of his administration, as the country continues to emerge from decades of deflation and tries to lock in a cycle of rising incomes and moderate inflation.
A recent Reuters survey, analysts say, gives reason for optimism: 51 percent of companies surveyed said they planned to raise wages by at least 3 percent in the financial year that began in March, up from 37 percent who said they would. in the previous year’s survey. Japanese companies raised wages by an average of 5.1 percent this year – the biggest in three decades.
The stimulus package is Ishiba’s first major initiative since he won internal party elections to become prime minister in October, then immediately jeopardized his position with a disastrous general election when the ruling bloc lost control of parliament.
Ishiba survived, but the Liberal Democratic Party and its junior coalition partner Komeito now rule with the cooperation of the DPP, leaving the prime minister in the ground. He flipped from fiscal hawk to dove almost immediately on his promotion to prime minister; political analysts have questioned whether Ishiba will last a year in the top job.
The ¥39tn stimulus plan, about a third of which will be driven by spending from the government’s general account and a significant portion of projected private sector spending, is the latest in a massive stimulus package that has raised concerns about fiscal discipline. and Japan’s status as a developed country with the largest ratio of public debt to GDP at 263 percent.
Stefan Angrick, senior economist at Moody’s Analytics, said that while Japan’s fiscal package appears to be huge, the actual fiscal expansion is usually smaller than the headline numbers suggest.
The current hand-wringing between domestic media and politicians over the topic of the income tax threshold reflects the fact that Japan is not used to thinking about the world with inflation, he said. Inflation increases tax revenue, reduces the budget deficit and destroys the debt stock, he added, meaning that the changes made by the DPP can be seen as an attempt to reduce the fiscal contraction.
“It does not mean that this is the right policy. Raising the threshold for the collection of personal income tax should strengthen consumer spending and generate demand-driven price pressure. But this happens when the supply-driven inflation spike has not yet ended,” said Angrick.
Energy and food prices in Japan continue to feel the effects of the weak yen, which has fallen higher against the dollar since US president Donald Trump’s election victory. Masamichi Adachi, chief Japan economist at UBS, is among many analysts who expect the BoJ to raise the policy rate from 0.25 percent to 0.5 percent at its next meeting on December 19.
“The only condition the BoJ needs for a rate hike is market stability . . . and we don’t expect any significant market turmoil beyond December 19,” Adachi said.
