The Japanese government has approved a massive stimulus package aimed at reviving the sluggish economy. Japan’s Prime Minister Sanae Takaichi said the government will use ¥17.7 trillion ($113 billion) to help the economy and keep bond rates steady. 

She will utilize current funds, savings, and other income to fund the plan and reassure bondholders. The Cabinet is expected to approve the extra budget on Friday.

Takaichi uses tax money and extra savings to pay for stimulus plan

The government of Japan announced that it will collect more money from taxes this year, and the Finance Ministry stated that the total revenue could reach ¥77.8 trillion, which is 12% higher than the forecast it had last year. Therefore, the government will utilize approximately ¥2.7 trillion from previous budgets without affecting tax revenue. 

The economic plan proposed by Takaichi has three pillars that determine how the government distributes funds and controls spending in the economy. The first pillar will handle the increasing prices and provide immediate relief to households and businesses facing higher costs for everyday goods, energy, and transportation. 

The second pillar involves investing in long-term growth and preparing for potential crises through funding strategic industries, while the third pillar focuses on strengthening Japan’s defense and diplomatic capabilities.

The stimulus will also offer households ¥20,000 in cash for each child, subsidies to cover electricity and gas bills from January to March 2026, rice vouchers for food security, and the removal of the temporary gasoline tax to lower fuel costs for households and businesses.

Families will now receive more money to cover basic expenses and have a surplus for spending on products made by local businesses that rely on consumer spending.

The government spends money to help growth while monitoring markets and problems

Prime Minister Takaichi’s $113 billion stimulus plan will also invest in shipbuilding, semiconductors, and artificial intelligence industries, as these sectors are crucial for maintaining the country’s competitiveness, creating jobs, and driving technological progress. The government will invest in these industries, so the country can grow stronger in the future. 

At the same time, Japan is facing economic challenges, as its economy shrank at an annualized rate of 1.8% in the September quarter. Inflation is also at around 3% and the yen has weakened by more than 10% against the US dollar in the past six months. Imports have become more expensive, and households and businesses are facing increased pressure. Therefore, the government will utilize these funds to boost the economy and stabilize the current situation.

Japan already has a high debt-to-GDP ratio of approximately 230%, and the cost of borrowing has begun to rise as well. Therefore, issuing too many new bonds will only increase interest rates and the cost of government debt. It will also destabilize financial markets, so the government must utilise existing funds, including leftover money from the previous budget, higher tax returns, and other non-tax revenues, to stimulate the economy.

Takaichi is being cautious with her methods because she wants to avoid repeating mistakes that occurred in other countries, such as in the United Kingdom in 2022, when high government spending without clear funding led to increased interest rates and caused investors to panic due to a sudden drop in bond prices. This incident demonstrated how quickly financial markets can react when a government fails to plan and communicate its spending effectively.

The government will also closely monitor the markets to gauge how families and businesses are responding to this new investment and identify areas that require adjustment.

Takaichi is using the example of former Prime Minister Shinzo Abe, who utilized government spending and monetary support to attempt to stimulate the economy. However, the situation today is different and more complicated, as Japan now has a higher debt, higher inflation, and a weaker currency. There are also international pressures from trade disputes and geopolitical risks that Abe did not face during his time.

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