The government approved Thursday an economic package of over 17 trillion yen ($113 billion) to help households hit by inflation with one-off tax cuts and chart a growth path for the economy beyond the cost-of-living crisis.
The total size will likely reach around 37.4 trillion yen when private-sector spending on projects related to the package is included, in the latest push by Prime Minister Fumio Kishida to get more money into people's pockets at a time when real wages are falling.
The key features of the measures are a tax cut of 40,000 yen per person and 70,000 yen in payouts to low-income households who are exempt from paying income and residential taxes and would otherwise be left out.
Designed to ensure a "complete break with deflation," the new measures are expected to curb consumer prices by around 1 percent as fuel costs will be cut by government subsidies that will be extended to next April. The economy, meanwhile, will get a 1.2 percent boost as measured by inflation-adjusted gross domestic product.
"Pay hikes are not outpacing inflation. This is the biggest challenge facing us," Kishida said at a press conference after his Cabinet finalized the package.
"If we miss out on the opportunity, it will become more difficult to exit deflation. We will boost the disposable incomes of households and consumption, and create a virtuous cycle," he said.
A supplementary budget will be formed to fund part of the package, which is expected to be around 13.1 trillion yen. The government plans to get parliamentary approval for the budget by the end of November.
Kishida wants to return a portion of increased tax revenues in recent years to the public at a time of faltering public support for his Cabinet as inflation continues to squeeze household budgets.
Opposition party lawmakers and critics, however, question the use of tax cuts as inflation-relief measures, partly because it will take time to legislate them.
Around 3.5 trillion yen will be used for the 40,000 yen tax reduction -- 30,000 yen for income tax and 10,000 yen for residential tax. The payouts for low-income households are expected to cost around 1.1 trillion yen.
The Liberal Democratic Party and its junior coalition partner Komeito will work out details toward the year-end, with the planned tax reduction expected to kick in in June.
After ramping up spending to cope with the COVID-19 pandemic and rising prices caused by Russia's war in Ukraine, debt-ridden Japan faces the challenge of reducing outlays to pre-crisis levels.
The new package is primarily intended to mitigate the pain felt by households, but it also aims to boost the nation's potential growth rate, which is estimated to be around 1 percent.
The government plans to utilize a spate of tax incentives, regulatory reforms and other means on top of fiscal spending. Small- and mid-size firms, in particular, will be incentivized to raise wages and invest in labor-saving technologies.
Another key pillar is to increase investment in critical areas for national security and future growth, including semiconductors and generative AI.
The government will focus on space and oceans as "the new frontiers" of growth. A new fund will be set up at the Japan Aerospace Exploration Agency to promote research and development at private-sector firms and universities, with 1 trillion yen as its initial target of assistance.
The world's third-largest economy has expanded for the third straight quarter to June, with private consumption and capital spending relatively resilient. But economists expect the growth momentum to lose steam as consumers are increasingly feeling the pinch of inflation.
"I will take the lead and urge companies to go ahead with bigger pay hikes than this year for the 'shunto' negotiations" in early 2024, Kishida said.
The annual wage talks this year between labor unions and management yielded the best outcome in about three decades with an average 3.58 percent increase. But real wage growth remains negative due to being outpaced by inflation.