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Japan’s Fumio Kishida is staking the future of his premiership on a $113bn stimulus plan centred on tax cuts and cash handouts, as he seeks to tackle the fallout from high inflation and record-low approval ratings.
Kishida’s gambit follows a dramatic reversal of fortunes for the prime minister, who had seized on Russia’s invasion of Ukraine to increase defence spending and scored a series of diplomatic wins including a historic rapprochement with South Korea.
Japan’s prime minister on Thursday announced a sweeping stimulus package of about ¥17tn ($113bn), of which ¥13tn will be funded by a supplementary budget for the remainder of the fiscal year until the end of March 2024.
At the heart of the package are measures to address higher costs of living, including roughly ¥5tn in temporary cuts to income and residential taxes as well as cash handouts to low-earning households.
The package also includes an extension of subsidies to offset rising petroleum and electricity prices as well as support for businesses to raise wages and strengthen supply chains.
“By combining wage increases [by companies] and a cut in income tax, I want to create a situation where the growth in public income will exceed the rise in prices by next summer,” Kishida said at a news conference on Thursday. “By doing so, an exit from deflation will be in sight.”
But even before the stimulus was signed off by his cabinet earlier in the day, Kishida’s plan had already backfired.
Approval for his administration has fallen to 33 per cent, the lowest since he was appointed prime minister in October 2021, according to a poll by Nikkei this week. Of those surveyed, 65 per cent disapproved of his plan to cut income tax.
With the yen sinking to a multi-decade low, import costs rising and real wages falling, surveys have shown that households are more worried about future tax rises to fund a significant boost in defence spending and more generous childcare benefits.
According to the Nomura Research Institute, the temporary tax cuts and handouts are expected to boost Japan’s real gross domestic product by just 0.2 per cent on an annual basis. Similar measures in the past have failed to spur meaningful consumption since Japanese households tend to save extra cash.
Despite pushing back plans to increase corporate and other taxes, the prime minister has suffered from a persistent impression that he will aggressively pursue fiscal discipline — spawning a nickname on social media linking his eyeglasses with his tax-raising image.
“He felt strongly that a tax cut was needed to address his tax hike image, and his willingness to take on a gambit accelerated,” said Takao Toshikawa, editor-in-chief of political newsletter Insideline. “But despite his political instincts that tax rebates would resonate with the public, he lacked communication skill and the ability to deliver a strong message.”
Had the economic package translated into higher popularity, Kishida would have probably called a snap election before the year’s end, according to Toshikawa. That prospect has now declined, and it remains unclear whether he will call a poll before his term as head of the ruling Liberal Democratic party expires next September.
Analysts said the prime minister should have triggered an election after he received a temporary boost in the wake of successfully hosting the G7 summit in May, which was attended by Ukraine’s president Volodymyr Zelenskyy. Since then, his administration has been rocked by scandals involving his son and closest aide, and data management issues with a national identification system.
Members of his own party and economists have criticised the tax cuts, saying measures to fuel an already robust economy are risky at a time when inflation is proving to be stickier than expected.
The stimulus package also comes days after the Bank of Japan took a significant step to end its seven-year policy of capping long-term interest rates, setting the stage for a gradual unwinding of ultra-loose monetary easing measures.
The yield on 10-year Japanese government bonds has recently risen to its highest level in a decade on the back of a surge in US Treasury yields. That has prompted the BoJ to revise its so-called yield curve control policy so that the 10-year JGB yield can rise above 1 per cent.
The tax cuts are only expected to take effect in June, which could come after the BoJ has lifted negative interest rates, with some economists forecasting a policy change in April.
“We believe that the BoJ will be careful not to spike JGB yields through its incoming policy normalisation, but if the fiscal discipline is met with doubt by market participants, this could spell difficulty for the central bank,” UBS economist Masamichi Adachi wrote in a recent note.
The central bank also significantly revised its inflation forecast upward, saying it expected 2.8 per cent core inflation in the 2024 fiscal year as oil prices rebound in response to the war between Israel and Hamas.
Annual core inflation, which excludes energy and fresh food prices, was 4.2 per cent in September.
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