Japan's New PM Working on 'Bold' Stimulus Package, Draft Shows

Japan’s new premier Sanae Takaichi is working on a big spending plan to support an economy on the cusp of emerging from stagnation.

Reuters claimed on Wednesday to have seen a draft of a stimulus package drawn up by her staff, and said that while it does not mention the size of spending, it calls for “bold and strategic” investment in crisis management and growth areas. That suggests the package is likely to include sizeable spending.

Describing Japan’s economy as in a transition period from one “prone to deflation and cost cuts,” the government will vow to spend “boldly without hesitation on necessary policies,” the draft showed.

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The package will include subsidies to lower utility and gasoline bills, aid to businesses hit by higher US tariffs and an expected increase in defence spending, Reuters reported.

Boost for AI, chips, shipbuilding

The government will also promote investment in key growth areas such as artificial intelligence (AI), semiconductors and shipbuilding, according to the draft.

Takaichi’s administration is expected to finalise the package later this month and compile a supplementary budget for the current fiscal year to finance part of the spending.

“The size of the package will be quite large,” as Japan’s economy still needs fiscal support and the long list of areas the administration promises to invest in, analysts at Daiwa Securities said in a research note.

“We won’t be surprised if spending financed by the extra budget reaches 20 trillion yen ($133 billion),” they said.

PM ‘hopes’ BOJ achieves wage-driven inflation

Meanwhile, Takaichi said she “strongly hopes” the central bank achieves inflation driven by wages rather than primarily through rising food costs, signalling her administration’s preference for interest rates to stay low.

Speaking in parliament on Wednesday, Takaichi said Japan still faced the risk of returning to deflation, which would prompt households to hold off spending, hurt corporate profits and discourage firms from raising wages.

She also voiced displeasure over recent inflation because it was driven mostly by rising food costs and potentially hurting the economy.

“I’d like to see Japan experience moderate inflation accompanied by wage increases. The type of inflation we’re seeing now is not good,” Takaichi said.

The government plans to announce a raft of measures to cushion the blow from rising living costs and lift investment in growth areas, which in turn will boost corporate profits and brighten consumer sentiment, she said.

“We will create a strong economy. This is a matter that affects monetary policy in a big way, so we hope to coordinate closely with the Bank of Japan,” Takaichi said.

“I strongly hope the BOJ conducts policy appropriately so it sustainably and stably achieves its 2% inflation target not through cost-push factors, but by wage gains,” she said.

Tricky position for BOJ

The remarks by Takaichi, known as an advocate of expansionary fiscal and monetary policy, reinforce the challenge facing the BOJ. Even before Wednesday’s comments, the Takaichi administration’s preference for low rates and fiscal largesse had raised complications for the BOJ’s decision on how soon to resume interest rate hikes.

While the BOJ kept interest rates steady at 0.5% last month, governor Kazuo Ueda has signalled the central bank’s readiness to hike rates as soon as December if it is sufficiently convinced that companies will keep hiking pay next year.

A delay in the next rate hike, which most market players expect to happen in December or January next year, could trigger renewed yen declines that push up import costs and broader inflation, analysts say.

Finance Minister Satsuki Katayama acknowledged that the negative aspects of the weak yen have become more pronounced than the positive factors, adding that the currency’s weakness was one element in pushing up raw material costs.

“Recently, we have been seeing one-sided and rapid movements in the foreign exchange market,” Katayama told the same parliament session on Wednesday, warning that authorities were monitoring developments with a “strong sense of vigilance.”

Katayama’s remarks briefly pushed down the dollar to around 154.55 yen from 154.75.

While a weak yen gives exports a boost, it has become a political headache for policymakers as it pushes up the cost of importing fuel, food and raw materials.

Core consumer inflation hit 2.9% in September, staying above the BOJ’s 2% target on stubbornly high food prices and keeping pressure on the bank to push up still-low borrowing costs.

Pessimists in the BOJ, however, fret about the fragile state of Japan’s economy. A Reuters poll showed analysts expect Japan’s economy to have shrunk an annualised 2.5% in the third quarter due partly to the hit from higher US tariffs.

China froths over Taiwan remark

In other news, a spat between China and Japan over Taiwan comments by Takaichi last week showed no signs of abating on Wednesday with a series of vitriolic commentaries in Chinese state media and calls in Tokyo to expel a Chinese diplomat.

Takaichi sparked the furore with remarks in parliament last week that a Chinese attack on Taiwan could amount to a “survival-threatening situation” and trigger a potential military response from Tokyo.

That drew a formal protest from China and a threatening post from China’s Consul General in Osaka, Xue Jian, which Tokyo said was “extremely inappropriate” and complained to Beijing about.

While Takaichi has since said she would refrain from making such comments again and Tokyo called for mutual efforts to reduce friction on Tuesday, a brace of Chinese state media commentaries suggest the furore could rumble on.

State broadcaster CCTV said in an editorial late on Tuesday that Takaichi’s remarks were of “extremely malicious nature and impact” and have “crossed the line” with China.

A post on a social media account affiliated with CCTV called Takaichi a “troublemaker”, using the word as a play on the pronunciation of her family name in Chinese.

“Has her head been kicked by a donkey?” said the post on the Yuyuan Tantian account. “If she continues to spew shit without any boundaries like this, Takaichi might have to pay the price!”

The CCTV editorial also likened Takaichi’s reference to “survival-threatening situations” with Japan’s 1931 invasion of northeast China’s Manchuria.

Beijing claims Taiwan, and has not ruled out using force to take control of the island, which sits just 110 km (68 miles) from Japanese territory. Taiwan’s government rejects Beijing’s sovereignty claims.

Meanwhile, some senior political figures in Tokyo have suggested expelling the Chinese diplomat Xue, who shared a news article about Takaichi’s remarks on Saturday and commented: “the dirty head that sticks itself in must be cut off”.

The post, which China said was made in a personal capacity, was later deleted.

Takayuki Kobayashi, the ruling party’s policy chief, urged the government on Tuesday to expel Xue if Beijing showed no effort to resolve the situation. Prominent opposition lawmaker Kenta Izumi also called for Xue’s quick expulsion.