Japanese Prime Minister Fumio Kishida yesterday said that the government would spend more than ¥17 trillion (US$113 billion) on a package of measures to cushion the economic blow from inflation, which would include tax cuts.
To fund part of the spending, the government is to compile a supplementary budget for the current fiscal year of ¥13.1 trillion, Kishida told reporters.
Including spending by local governments and state-backed loans, the size of the package would total ¥21.8 trillion.
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“Japan’s economy is seeing a big opportunity to open up to shift to a new stage for the first time in three decades,” as it exits from a deflationary spiral, Kishida told a meeting of government and ruling party executives. “That’s why we need to help companies boost profitability and earn revenues to boost wages.”
Reuters reported on Wednesday that the government was considering spending more than ¥17 trillion for the package, which would include temporary cuts to income and residential taxes, as well as subsidies to curb gasoline and utility bills.
Inflation, fueled by rising costs of raw materials, has kept above the bank’s target of 2 percent for more than a year, weighing on consumption and clouding the outlook for an economy making a delayed recovery from scars left by the COVID-19 pandemic.
The rising cost of living is partly blamed for pushing down Kishida’s approval ratings, piling pressure on the prime minister to take steps to ease the pain on households.
With increases in wages proving too slow to offset rising prices, Kishida had said the government would cushion the blow by returning to households some of the expected increase in tax revenues generated by solid economic growth.
However, analysts doubt whether the roughly ¥5 trillion to be spent on tax cuts and payouts would do much to boost consumption and Japan’s economic growth.
Takahide Kiuchi, a former Bank of Japan board member who is an economist at Nomura Research Institute, expects the measures to lift GDP by just 0.19 percent for the year.
“It’s a policy that isn’t very cost effective,” he said. “With Japan’s output gap having turned positive in April-June, the economy doesn’t need a stimulus package in the first place.”
Japan’s economy expanded an annualized 4.8 percent in the second quarter, the biggest increase in more than two years, as an end to COVID-19 pandemic curbs boosted consumption, but falling real wages in July added to doubts over central bank projections that domestic demand could keep the nation on a steady recovery path.
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