In a bid to fight the economic impact of surging inflation, Japan’s government is considering a massive 17 trillion yen ($112 billion) package of measures, as revealed in a draft obtained by Reuters. To fund a major portion of this spending, the government intends to compile a supplementary budget for the current fiscal year, estimated at 13.1 trillion yen.
This ambitious initiative was announced by Prime Minister Fumio Kishida, who expressed his hope to finalise the package by November 2. The many measures included in this package aim to provide much-needed relief to the Japanese population in the face of rising living costs. Temporary reductions in income and residential taxes, coupled with subsidies to ease the burden of rising gas and utility bills, are key components of the plan.
A Tight Situation for Japan
Japan‘s economy has been grappling with the prolonged impact of inflation exceeding the central bank’s 2% target. This has had a noticeable effect on consumer spending and cast a shadow over the nation’s economic recovery. The rising cost of living has put massive pressure on Prime Minister Kishida, leading to a decline in his approval ratings. In response to these problems, the government seeks to return a portion of the increase in tax revenues generated by the economy back to households, effectively cushioning the impact of inflation.
While the prime minister acknowledges the country’s strong economic growth, the increases in wages have not kept pace with the surge in prices. As a solution to this predicament, Prime Minister Kishida plans to redistribute tax revenues to households, aiming to provide relief amid the inflationary pressures.
Japan has more experience dealing with deflation than inflation
Japan has grappled with persistent deflation for most of the past few decades. Deflation is defined as a sustained decrease in the general price level of goods and services. In the case of Japan, this phenomenon has been primarily driven by the country’s aging population. As the proportion of elderly citizens increased, there was a tendency to save more and spend less, which led to a decrease in consumer demand. This reduced consumer spending, in turn, exerting downward pressure on prices.
In response to this persistent issue, the Japanese government and the Bank of Japan implemented various measures, including unconventional monetary policies and economic stimulus packages, to combat deflation and stimulate economic growth. The ongoing effort to address deflation in Japan serves as a case study of the complexities and challenges associated with managing a deflationary economy while seeking to achieve sustainable economic growth.
Furthermore, Japan’s history of low interest rates and monetary policies aimed at stimulating growth has not yielded the desired results. While these policies were designed to boost spending and investment, they also inadvertently contributed to deflationary pressures by creating a cycle of low inflation or price stagnation.
This recent move further followed the Bank of Japan’s decision to allow 10-year government bond yields to rise above 1%, a response to the weakening of the yen over the past 18 months. Japan’s comprehensive economic package is a major effort to address the challenges posed by rising inflation and further stabilise its economy.