Japan unveils a $113 billion package to ease inflation

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

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

Including local government spending and state-backed loans, the size of the package will reach 21.8 trillion yen.

Kishida said at a meeting of government and ruling party executives on Thursday that “the Japanese economy is witnessing a great open opportunity to move to a new stage for the first time in three decades” as it emerges from the downturn.

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

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

Inflation, fueled by rising raw material costs, has remained above the central bank’s 2% target for more than a year, weighing on consumption and casting doubt on the outlook for an economy that is lagging in recovering from the scars left by Covid-19.

The high cost of living is partly to blame for Kishida’s low approval ratings, which has increased pressure on the prime minister to take steps to ease the pain for families.

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

However, analysts doubt whether spending nearly 5 trillion yen on tax cuts and payments will do much to boost consumption and economic growth in Japan.

Takahide Kiyuchi, a former Bank of Japan board member who now works as an economist at Nomura Research Institute, expects the measures to lift GDP by just 0.19% for the year.

“It’s not a cost-effective policy,” he said. “With Japan’s output gap turning positive in April and June, the economy does not need a stimulus package in the first place.”

Japan’s economy grew 4.8% year-on-year in the second quarter, the largest increase in more than two years, as the end of COVID-19 restrictions boosted consumption. But a decline in real wages in July raises doubts about the central bank’s expectations that domestic demand can keep the country on a steady recovery path.

($1 = 150.5100 yen)

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