Japanese Prime Minister Fumio Kishida unveiled a sweeping stimulus package on Thursday, valued at around 17 trillion yen (about US$113 billion), aimed at addressing the country’s rising costs of living.
It’s also aimed, most probably, at improving his administration’s falling popularity. The approval rating for his cabinet dropped 9 percentage points from September to 33%, according to a poll Nikkei and TV Tokyo conducted. That was the lowest since he took office in October 2021.
The heart of this initiative includes an estimated 5 trillion yen in temporary cuts to income and residential taxes, as well as cash handouts to low-earning households.
While this proposal has gained attention and support, it has also faced legitimate criticism.
Like many, I believe that these measures could be risky at a time when inflation is proving to be stickier than expected.
At first glance, the idea of implementing tax cuts and providing financial relief to low-earning households seems like a logical step to stimulate economic growth and to provide assistance to those in need.
But these tax cuts may be premature, given Japan’s already robust economy.
Japan has experienced steady growth in recent years, and implementing these tax cuts now may overheat the economy, potentially leading to an unsustainable surge in inflation. The concern is that by providing additional disposable income to households, consumer spending could spike, potentially exacerbating the inflation problem – which, in the end, always hits lower income households disproportionately.
The country has been grappling with persistent low inflation, or even deflation, for years. While inflation can be seen as a sign of a healthy economy, it’s important to differentiate between moderate, desirable inflation and the kind of rapid, unsustainable inflation that can erode the purchasing power of consumers and destabilize markets.
Economists worry that by introducing these measures at a time when inflation is already proving to be “stickier” than expected, Japan may inadvertently exacerbate the problem.
Furthermore, the stimulus package does not address some of the structural challenges that Japan’s economy faces, such as its rapidly aging population and a shrinking workforce.
These are some of the issues that should take precedence, and funds would be better spent on measures to address these long-term challenges rather than stoking short-term economic growth.
While concerns surround Japan’s tax cuts and cash handouts and their potential impact on the economy, we expect international investors to maintain their recently renewed interest in Japanese stocks.
The stability of Japan’s stock market, its ongoing innovation and strong corporate governance, combined with the lure of diversification and global economic integration, will likely continue to draw investors seeking opportunities in the Land of the Rising Sun.
Nigel Green is founder and CEO of deVere Group. Follow him on Twitter @nigeljgreen.