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To address the economic challenges stemming from inflation, a new Japan stimulus package worth over 17 tn yen ($113 bn) was unveiled by the country’s Prime Minister Fumio Kishida on November 2, 2023.
When considering contributions from the private sector, the overall value of the stimulus package is anticipated to reach a staggering 37.4 tn yen ($248.64 bn). As per Kishida, a substantial portion of this financial infusion, approximately 13.1 tn yen ($87.1 bn), will be sourced from an additional budget.
The stimulus package also includes an extension of fuel subsidies and allocations to high-growth industries like space, electric vehicles, and semiconductors.
Notably, one of the significant components of this plan is the implementation of income and residential tax cuts, totalling approximately 3.5 tn yen ($23.26 bn). Besides, local media reports indicate that the government will allocate over one tn yen ($6.64 bn) to support low-income households.
Kishida explained that as the wages were not rising in tandem with price increases, the government moved to boost consumption by increasing the disposable income of citizens through tax cuts.
Notably, the government had also unveiled a 29 tn yen stimulus package in October 2022. While the latest stimulus plan aims to rejuvenate the Japanese economy, it also raises concerns about the nation’s existing debt burden, which reached 261.29% of its GDP in 2022. This positioned Japan as the country with the highest debt-to-GDP ratios globally.
Japan’s inflation persistently exceeds the target set by the BoJ
The introduction of a new Japan stimulus package comes at a time when the country has exceeded the Bank of Japan’s (BoJ) 2% inflation target for 18 consecutive months as of September 2023.
Japan had been grappling with deflation for decades, but like many other economies worldwide, it experienced an increase in prices since the Ukraine war began in February 2022.
Japanese officials have insisted that this increase is temporary, even though they have revised their inflation forecasts upwards for this year and the next. The BoJ has raised its median forecast for core inflation to 2.8% inflation for FY24 (up from 1.9%) and 1.7% for FY25 (up from 1.6%).
Along with rising prices, the yen has also depreciated by 20% against major currencies since early 2022. Against the US dollar, the value of the Japanese currency has fallen by around 30%.
In response to this macroeconomic scenario, Japan’s monetary policy was adjusted to focus on flexibility, marking the BoJ’s second adjustment to its yield curve control (YCC) framework in three months.
However, the central bank decided to keep interest rates below zero and bond yields ultra-low to stimulate economic growth. “…markets appear disappointed with the BoJ’s willingness to keep its YCC framework, with initial reactions showing USD/JPY and JGB yields moving higher,” says Senior Economist, South Korea and Japan, at ING.
Looking ahead, the IMF anticipates Japan’s GDP to grow by 2% in 2023, up from 1.7% last year. Additionally, consumer prices for the year are expected to be at 3.2%, well above the BOJ target.
“Concerning risks to the outlook, there are extremely high uncertainties surrounding Japan’s economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms’ wage- and price-setting behaviour,” said the BOJ.
“Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the central bank added.
