Japan's new PM is preparing large economic stimulus to tackle inflation

Japan's new Prime Minister Sanae Takaichi is preparing an economic stimulus package that is likely to exceed last year's $92 billion to help households tackle inflation, government sources familiar with the plan said on Wednesday.

The package of more than 13.9 trillion yen ($92.19 billion) is Takaichi's first major economic initiative since the advocate of big fiscal spending took office on Tuesday, reflecting a commitment to what she calls "responsible proactive fiscal policy".

It will be built around three main pillars: measures to counter inflation, investment in growth industries, and national security, the sources said, declining to be identified because the matter is still private.

Japan's benchmark Nikkei erased losses and turned higher on Wednesday after the Reuters report, while the yen pared morning gains and was little changed.

Investors are closely watching Takaichi's spending plans as Japan is one of the world's most indebted economies.

As part of its core inflation relief measures, the Takaichi administration plans to swiftly abolish the provisional gasoline tax rate.

It also aims to expand local government grants, with a focus on supporting small and medium-sized companies that are unable to benefit from existing tax incentives for wage hikes.

The package will also include investments in growth sectors such as artificial intelligence and semiconductors as the government focuses on strategic economic development.

The exact scale of the package is still being finalised, the sources said. It could be announced as early as next month.

It was too early to talk about the size of the upcoming extra budget, Japan's new finance minister, Satsuki Katayama, said at a news conference on Wednesday, but it should be of sufficient scale to cover all measures needed.

To fund the measures, the government is moving ahead with drafting a supplementary budget for the current financial year through March, with an eye toward passing it during the upcoming extraordinary parliament session.

If additional spending exceeds initial expectations, the government may need to issue deficit-covering bonds, raising questions about how to balance economic growth with fiscal discipline.

The plan "is consistent with Takaichi's policy list during the campaign (in the ruling party's leadership race)," said Shigeto Nagai, head of Japan economics at Oxford Economics.

It's not so different from previous administrations, which have used all the additional tax revenue from higher inflation for large supplementary budgets to support vulnerable households, rather than working toward its goal of achieving a primary fiscal surplus, Nagai added.

Takaichi was elected Japan's first female prime minister on Tuesday. The parliament vote drove down the yen and bond yields on expectations Takaichi's presence could delay further interest rate hikes by the Bank of Japan.

A long-time advocate of late Prime Minister Shinzo Abe's "Abenomics" stimulus policies, Takaichi has called for higher spending and tax cuts and pledged to reassert government sway over the central bank, which is weighing more interest rate hikes and will hold its next policy meeting on October 29-30.

Monetary policy is part of a broader economic policy the government holds final responsibility for, she told a news conference on Tuesday, adding that specific means of monetary policy were up to the BOJ to decide.

Meanwhile Japan's new finance minister, Satsuki Katayama, said on Wednesday that it is necessary for the government and the Bank of Japan to coordinate to make economic and monetary policies effective.

Katayama declined to comment when asked about the timing of the central bank's potential rate hike, saying that it is up to the BOJ on specifics of monetary policy.

With regards to the yen's weakness, she said a weak yen could generally push up the cost of food and other daily necessities and weigh on households and businesses. "Because of that, we need to be quick to launch measures to help tackle inflation," she said.

Meanwhile Japanese stocks rallied to a record peak on Wednesday as markets reacted positively to a Reuters report that the new premier is preparing a sizeable stimulus package that includes measures to help households tackle inflation.

The Topix ended the day up 0.5% at a record-high closing level of 3,266.43, and earlier marked an all-time intraday high of 3.274.94.

The Nikkei finished down very slightly for the day at 49,307.79, missing out on extending Tuesday's record closing high in the final moments of trading. The index recovered from losses as steep as 1.4% earlier in the session to be up as much as 0.3% after the Reuters report.

Fiscal and monetary policy dove Sanae Takaichi, who was confirmed as prime minister by parliament on Tuesday, is preparing an economic stimulus package expected to exceed last year's 13.9 trillion yen ($92.19 billion), government sources told Reuters on Wednesday.

Reuters