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The newly formed government of Prime Minister Shigeru Ishiba has approved a $250bn economic stimulus package aimed at giving Japan a “sense of wellbeing” as households battle rising prices and the country adjusts to the idea of life with inflation.
The giant stimulus plan, which envisages support for the AI and semiconductor industries along with cash handouts and energy subsidies for lower-income households, comes as financial markets have become increasingly confident that the Bank of Japan will raise interest rates at its meeting in December.
The scale of the package, and the debate over its necessity, will now be a key focus of a draft supplementary budget that will be submitted to the extraordinary session of parliament being convened later this week.
The package in its current form includes a large and potentially transformational rise in the minimum salary threshold for income tax from its current $6,640 — a level that has remained unchanged for 29 years and one that critics claim has discouraged large parts of the population from fully joining the workforce.
By setting the threshold to $11,500, argue its proponents, huge numbers of Japanese — especially women — who currently tailor their work and earnings to come in just below the income tax trigger-level will work longer, earn more and consequently push more disposable income into an economy facing long-term pressures of a shrinking, ageing population.
Critically, the income tax plan is the signature initiative of a small opposition party — the Democratic People’s Party — on which Ishiba’s government now depends. The inclusion of the policy, said analysts, highlights the fragility of the new prime minister’s position and his forced reliance on populist initiatives.
“The most important thing is to raise wages for all generations,” Ishiba told reporters on Friday, ahead of the stimulus package being approved by the Cabinet Office.
The DPP’s proposal has triggered fierce debate within the ruling coalition and beyond, particularly because tax revenue would fall by about $45bn under the new threshold, according to a government estimate. Critics see the idea as reckless fiscal expansion, and as a source of greater income inequality. Others fear it could stoke too rapid an increase in inflation.
Ishiba is the latest Japanese prime minister to make wage growth a stated focus of his government, as the country continues to step away from its decades of deflation and attempts to lock in a cycle of rising incomes and moderate inflation.
A recent Reuters survey, said analysts, offered grounds for optimism: 51 per cent of the companies surveyed said they planned to raise wages by at least 3 per cent in the financial year that began in March, up from 37 per cent who had said that in the previous year’s survey. Japanese companies have raised wages by an average 5.1 per cent this year — the largest in three decades.
The stimulus package is Ishiba’s first major initiative since he won an internal party vote to become prime minister in October, then immediately jeopardised that position with a disastrous snap general election in which the ruling bloc lost control of parliament.
Ishiba survived, but his Liberal Democratic Party and its junior coalition partner Komeito now rule with the co-operation of the DPP, leaving the prime minister on shaky ground. He flipped from fiscal hawk to dove almost immediately on being elevated to prime minister; political analysts already question whether Ishiba will last a full year in the top job.
The ¥39tn stimulus plan, of which roughly a third will be driven by spending from the government’s general account and a significant portion coming from projected private sector spending, is the latest in a long line of vast stimulus packages that have rekindled concerns around fiscal discipline and Japan’s status as the developed country with the largest ratio of public debt to GDP at 263 per cent.
Stefan Angrick, senior economist at Moody’s Analytics, said that while Japanese fiscal packages always look enormous, the actual fiscal expansion was typically smaller than the headline numbers suggested.
The current hand-wringing among domestic media and politicians on the topic of the income tax threshold reflected the fact that Japan is not yet accustomed to thinking about a world with inflation, he said. Inflation boosts tax revenue, shrinks the budget deficit and erodes the debt stock, he added, meaning the changes the DPP has pushed for could be seen as an effort to slow the fiscal contraction.
“That doesn’t mean this is the right policy. Raising the threshold for personal income tax collection should strengthen consumer spending and generate demand-driven price pressure. But this comes at a time when the supply-driven inflation surge has yet to fully wear off,” said Angrick.
Prices of energy and food in Japan are continuing to feel the effects of the weak yen, which has fallen further against the dollar since the US presidential election victory of Donald Trump. Masamichi Adachi, chief Japan economist at UBS, is among a growing number of analysts who expect the BoJ to raise its policy rate from 0.25 per cent to 0.5 per cent at its next meeting on December 19.
“The only condition that the BoJ needs for the rate hike should be market stability . . . and we do not expect significant market turmoil through 19 December,” said Adachi.
