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Japan’s Prime Minister Takaichi Sanae pushed through a massive ¥21.3 trillion ($135 billion) stimulus package, the biggest extra‑budget move since the pandemic.
Her cabinet approved it to deal with voter anger over high prices and to counter the economic drag that has been building for months.
Officials warned that investors watching Japan’s stretched finances may react sharply, but Takaichi moved ahead anyway.
The Cabinet Office said the plan includes ¥17.7 trillion ($112 billion) in general account spending, funded through an extra budget. That figure is 27% higher than what the previous administration approved last year.
Most of the money goes toward price relief, since inflation has stayed above the Bank of Japan’s 2% target for 43 straight months, the longest run since 1992. As Takaichi put it, “We’ve put together this package to protect livelihoods, and particularly to respond quickly to the problem of inflation.”
Takaichi targets price relief with large direct support
The government set aside ¥11.7 trillion for direct price relief. That includes ¥7,000 in subsidies for gas and electricity bills for every household, paid over three months through March.
The plan adds a one‑time ¥20,000 payment per child and ¥2 trillion in support for regional governments.
Economist Saori Tsuiki from Mizuho Research & Technologies said the final number ballooned because a minority government must deal with opposition demands. She warned, “If the larger amount sends an unintended message to markets or overseas and ends up adding to yen‑weakness risks, we may have to discount the expected economic impact of the package.”
The government expects these price steps to lower the inflation gauge by 0.7 percentage point on average between February and April.
The stimulus also includes ¥1 trillion to abolish the gasoline tax, an idea pushed by opposition parties including Ishin, the new junior coalition partner. Another ¥1.2 trillion will go toward raising the income‑tax‑free threshold, which was also proposed outside the ruling party.
Spending goes beyond household support. The plan sets aside ¥1.7 trillion to boost defense and diplomatic capacity. Of that total, ¥1.1 trillion will help lift defense spending to 2% of GDP this fiscal year, after Takaichi moved the target forward by two years. Another ¥7.2 trillion is allocated for crisis‑management investment, covering areas the government says need urgent reinforcement.
Markets react as debt fears rise and bond yields jump
The package also includes ¥700 billion in reserve funds for natural disasters and even bear‑related incidents, a growing issue in rural areas. Public sentiment appears to favor the overall plan. An ANN poll last week showed Takaichi’s approval rising 8.8 points to 67.5%, with most respondents expecting the stimulus to help.
But markets are already signaling concern. People familiar with budget discussions allegedly expect bond issuance to exceed last year’s levels. Yields on 5‑ and 10‑year Japanese government bonds have hit their highest point since 2008, with longer‑dated yields climbing further. The yen weakened past 157 per dollar, its softest level since January, prompting warnings from senior officials.
Analyst Rain Yin of S&P Global Ratings said, “It is clear that Japan will face higher spending pressure on social security, interest payment and national defense for some time,” though she noted their sovereign rating already reflects Japan’s long‑standing fiscal weaknesses.
Takaichi insisted she still expects this year’s new bond issuance to stay below last year’s ¥42.1 trillion. With the initial budget, Japan had planned to issue about 20% less than in the previous year. She added, “We’ve given ample consideration to fiscal sustainability as well.”
The government estimates the package will lift GDP growth by 1.4 percentage points per year, on average, for three years if the measures roll out as planned. Japan’s economy contracted in the July–September quarter, partly due to the impact of US tariffs.
The plan also strengthens the financial base of the Japan Bank for International Cooperation and Nippon Export and Investment Insurance, both tied to carrying out a $550 billion investment fund created under the Japan‑US tariff deal.
The government will also seek new funding sources for investment in shipbuilding, quantum technology, and critical minerals, areas considered key to national economic security.
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