TOKYO (AP) – Japan’s cabinet approved a major economic package Friday that includes 29 trillion yen ($200 billion) in government spending to offset the blow to household budgets from inflation, signaling that the biggest concern from its policy makers 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 close to 3%, Japan has mostly stuck to using fiscal measures, or government spending, to counter this challenge.
The Bank of Japan underlined that as it wrapped up a policy meeting on Friday, it was sticking to its long-standing policy of holding its benchmark interest rate. to minus 0.1%.
The Federal Reserve has aggressively raised borrowing costs to combat chronic inflation, raising interest rates five times this year. It is scheduled to do so again next week and in December, while warning that hikes will likely lead to increased 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 financing and fiscal measures, is expected to total 71.6 trillion yen (490 thousand million dollars) and boost economic growth by 4.6%.
“The economic measures are designed to overcome rising prices and achieve economic recovery,” Kishida told a news conference. “We will protect 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 needs to be approved by parliament. It includes subsidies of about 45,000 yen ($300) for household electricity and gas bills and coupons worth 100,000 yen ($680) for women who are pregnant or raising babies.
Kishida pledged to compile and present a budget plan and pass it as soon as possible.
The stimulus package includes household subsidies that are largely seen as an attempt by Kishida to shore up his popularity. His government has been rocked by revelations of close ties between the ruling Liberal Democratic Party and the South Korea-based unification church that emerged after the assassination of former leader Shinzo Abe in July.
Rising global prices and a weakening yen have boosted Japan’s import costs, pushing up inflation. But its economy grew at a modest annual rate of 2.2% between April and June and is expected 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 lift inflation to a target rate of 2 percent and spur what it calls a “virtuous cycle” of economic growth by making consumers and businesses spend and invest more. Although prices have finally risen beyond the target, the central bank expects them to fall again. It also looks ahead, looking for signs that rate hikes elsewhere could trigger a recession.
By keeping credit so cheap while the Fed raises rates, the BOJ risks seeing the yen weaken further. Higher interest rates in the United States have led investors to dump other currencies, including the yen, for dollars, pushing up their value.
In turn, a weaker yen will push up prices in Japan, as it matters a lot of what it consumes.
Takahide Kiuchi, executive economist at Tokyo’s Nomura Research Institute, criticized the package for focusing primarily on the sheer scale of spending, rather than the quality of spending.
“The Bank of Japan’s ultra-easy monetary policy and the government’s expansion in fiscal spending create a policy mix that hurts market confidence 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 higher wages, 4.8 trillion yen ($32.5 billion) for tourism, the promotion of exports and other measures to take advantage of the yen’s weakness; 6.7 trillion yen ($45 billion) in investments in measures to deal with Japan’s declining population and reduce dependence on fossil fuels and 10.6 trillion yen ($72 billion) in spending on economic and food security and in public works.
Since the spending will be financed by issuing government bonds, it will further worsen Japan’s worsening national debt after heavy spending during the pandemic. Japan now has long-term debt that exceeds 1.2 trillion yen ($8.2 trillion), or more than twice the size of its economy.
Kishida said on Friday that the government was closely monitoring exchange rate movements. 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 above 150 yen. On Friday, it was trading near 148 yen to the dollar. Earlier this year, it was around 115 yen.
Any market reaction to further stimulus was likely already factored in earlier in the week, as stock prices fell in Tokyo on Friday, with the benchmark Nikkei 225 losing 0.9% to 27,105, 20.
AP business writer Elaine Kurtenbach in Bangkok contributed.
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