Japan’s largest economic stimulus

📈 Japan’s Cabinet, led by Prime Minister Sanae Takaichi, has approved a massive economic stimulus package worth 21.3 trillion yen (about $135 billion). This is the largest move by the Japanese government to stimulate the economy since the COVID-19 pandemic and the first major step by the new cabinet, which came to power promising to expand budgetary support and revive domestic demand.

Key components of the package

The total amount of spending under the package reaches 17.7 trillion yen, significantly higher than last year’s 13.9 trillion yen. Additionally, the government provided 2.7 trillion yen in tax relief, including the cancellation of the gasoline tax and support for household electricity and gas expenses.

The package is aimed at several objectives:

• Household support: a standard family will receive about 7,000 yen of aid over a three-month period starting in January.
• Strengthening the economy: stimulating domestic demand and reducing recession risks.
• Development of strategic industries: creation of a ten-year fund for shipbuilding, raising defense spending to 2% of GDP by 2027.
• Subsidies to local authorities: compensating part of utility expenses and directly stimulating the economy at the regional level.

Market and currency reaction

The measures caused nervousness in financial markets:

• the yen fell to ten-month lows;
• long-term bond yields reached record levels;
• investors fear that the stimulus will worsen already high government debt.
  
  

The government seeks to balance spending using excess tax revenues and non-tax income, while the financing gap is covered by issuing additional bonds. The prime minister emphasized that the total volume of government borrowing will be lower than last year’s 42.1 trillion yen despite the additional expenditures.

Economic context

Japan’s economy is in a difficult position:

• in Q3 2025, the country’s GDP declined for the first time in six consecutive quarters — -0.4% compared to the previous quarter and -1.8% year-on-year;
• exports in October grew by 3.6%, partially offsetting falling sales in the U.S. thanks to shipments to Asian and European countries;
• inflation reached 3%, exceeding the Bank of Japan’s target for 43 months in a row.

Central bank governor Kazuo Ueda warned that a weak yen could accelerate inflation by raising the cost of imported goods. Finance minister Satsuki Katayama expressed concern about sharp exchange rate fluctuations and hinted at possible currency interventions.

Possible market implications

For global finance, the stimulus may have a dual effect:

1. inflow of liquidity: supporting risk assets, including stock markets and the crypto market;
2. risk of inflation and tightening by the Bank of Japan: if inflation accelerates, interest rate hikes and a global “risk-off” may follow, negatively affecting risk assets.

Tokyo Stock Exchange (TSE) building in Tokyo, Japan, October 1, 2020. REUTERS

Economists note that income support measures will provide temporary relief but will not solve structural economic problems. Jesper Koll (Monex Group) believes that Takaichi’s policy looks like an attempt to buy time, and government bond markets may react painfully due to the lack of long-term productivity growth incentives.

Political background

The Liberal Democratic Party is currently in the minority, but together with the Japan Innovation Party holds 231 seats in the lower house — just two short of a majority. To pass the budget, the government relies on support from the opposition and an accelerated parliamentary process.

📚 Conclusion

The new stimulus package is an attempt to strengthen domestic demand, ease price pressure, and prevent economic downturn, but at the same time it intensifies debate about further expansion of government spending amid high debt levels. For investors and global markets it is a signal to closely monitor developments and expect volatility in currencies and bonds, while for Japan’s economy it is a chance to stabilize consumption and prepare for future growth.