Japan’s Economic Panel Calls for Larger Stimulus Package

In a significant move, two newly appointed members of Japan’s Council of Economic and Fiscal Policy have advocated for a more substantial economic stimulus package than the one introduced the previous year. This call comes as the country grapples with rising living costs and potential economic contraction. The members, Masazumi Wakatabe, former Deputy Governor of the Bank of Japan, and Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute, both prominent supporters of former Prime Minister Shinzo Abe’s economic policies, outlined their vision during the panel’s first meeting under the administration of Prime Minister Sanae Takaichi.

At the meeting, Wakatabe and Nagahama emphasized that the proposed stimulus must surpass last year’s package, which amounted to 13.9 trillion yen (approximately $92.19 billion). Nagahama articulated concerns that if the fiscal package does not exceed the previous year’s level, expectations for a proactive fiscal policy could diminish. He stated, “Expectations for proactive fiscal policy could weaken if the general account expenditure for the package fails to exceed the previous year’s level.”

The focus of the new stimulus package is expected to address several pressing issues, including alleviating the financial strain on households due to increasing living costs, enhancing investments in crisis management and growth sectors, and bolstering Japan’s defense capabilities. The Council of Economic and Fiscal Policy plays a crucial role in shaping Japan’s long-term fiscal strategy and policy priorities, with key economic ministers and the Bank of Japan governor actively participating in discussions.

The Takaichi administration’s commitment to expansionary policies may influence the Bank of Japan’s timeline for resuming its rate-hike cycle, which has been on hold amid uncertainties regarding the economic impact of rising U.S. tariffs. Both Wakatabe and Nagahama highlighted the potential for a sharp contraction in Japan’s gross domestic product (GDP) for the July to September quarter. A recent Reuters poll indicated that Japan’s GDP is expected to have contracted by an annualized 2.5 percent in the third quarter, marking the first decline in six quarters, exacerbated by weak export performance due to U.S. tariff policies.

Following Takaichi’s election as the first female prime minister on October 21, 2023, Japanese stock prices have seen a rise, driven by market optimism regarding increased governmental spending aimed at economic revitalization. Wakatabe, a long-time advocate for reflationary policies, called for a departure from the traditional fiscal thinking established during the deflationary period. He suggested that policymakers should consider multi-year investment planning rather than adhering strictly to a single-year budget principle. This aligns with Prime Minister Takaichi’s own calls for a shift in fiscal strategy.

Wakatabe also stressed the necessity for close coordination between fiscal and monetary policy to achieve stable and sustainable economic growth, referencing Article 4 of the Bank of Japan Act, which mandates an alignment of policies. As Japan navigates these complex economic challenges, the outcomes of the upcoming stimulus package will be critical in shaping the nation’s fiscal landscape.