TOKYO - Takaichi’s administration is moving closer to finalizing its economic package aimed at easing the strain of rising prices, with the government preparing a set of measures that include a gasoline tax cut, fresh investments across 17 priority fields and expanded subsidies for electricity and gas bills.
The Cabinet is expected to decide as early as this week how much will be allocated to each measure, but experts say parts of the plan may contain contradictions, and opinion is split on whether the scale of spending is appropriate.
The latest economic signal has added to the unease. Japan’s GDP for the July–September quarter, announced on Monday morning, showed its first contraction in six quarters on an annualized basis. How should this downturn be interpreted, and what does it mean for the government’s economic strategy? Based on interviews with Nomura Research Institute’s Kiuchi, MBS announcer Yamanaka presented an analysis of the emerging policy debate.
Takaichi’s price relief measures are becoming clearer, with the administration set to approve the supplementary budget on Friday. Alongside the gasoline tax cut and investments in priority sectors, subsidies for electricity and gas bills are expected to increase, with the government to announce how much will be spent and on what. While tax cuts and subsidies are welcomed by many, the budget is not unlimited. Specialists warn that some elements of Takaichi’s plan contain internal inconsistencies, and reactions are divided. Meanwhile, the GDP growth rate released this morning marked the first negative figure in six quarters, raising questions about how this downturn should be interpreted and how it might influence upcoming economic decisions.
Household burdens remain heavy. The average retail price of 5 kilograms of rice rose by 81 yen from the previous week to 4,316 yen in the latest report released last Friday, surpassing May’s level and reaching a six-month high. At one supermarket, 5 kilograms of Koshihikari rice from Uonuma was selling for 5,778 yen. Consumers voiced frustration, saying prices are "not falling at all."
The pressure extends well beyond rice. Daily necessities and utility bills continue to weigh on households, prompting the government to accelerate its policy discussions. On Sunday, Takaichi met with Chief Cabinet Secretary Kihara, Finance Minister Katayama and other senior officials to finalize the economic package. “We examined from all angles how to swiftly address the price anxieties people are directly facing and how to ensure the measures take effect,” Takaichi said.
According to government officials, the package will include subsidies of roughly 2,000 yen per month to offset electricity and gas bills from January through March next year, with the total size of the measures expected to exceed 17 trillion yen.
The Cabinet Office also released the July–September GDP figures, showing a real annualized decline of 1.8 percent. Kiuchi says the weak data could prompt the government to consider expanding the scale of the supplementary budget further. “There is a possibility the size will grow,” he said. But he also warned that major spending on price relief risks worsening Japan’s fiscal condition, potentially weakening the yen and leading to even higher prices. In some cases, the negative effects could outweigh the benefits, he said.
Takaichi’s economic strategy—which is set to be approved on Friday—comes at a time when rice prices remain high and households continue to struggle with rising costs. The supplementary budget is projected to exceed 17 trillion yen. While many welcome broad-based support, others fear runaway spending. Last year’s general account supplementary budget totaled 13.9 trillion yen; this year’s measures, including tax cuts, will surpass that amount.
According to Katayama, the scale of the package continues to expand as necessary funds are added. The main pillars so far include three areas. First, abolishing the provisional gasoline tax rate is estimated to save roughly 5,400 yen per household per year on average, though the impact will vary depending on car usage. Because subsidies are already in place, prices will fall only in stages rather than dropping sharply overnight.
Second, gas subsidies will be expanded during the winter months from January to March. An estimated 2,000 yen per month will be provided to the average household, or about 6,000 yen over three months. Combined with electricity subsidies, the government plans to spend about 3.2 trillion yen on this measure. Annual household relief is expected to total around 11,000 yen, though the burden varies by household. With prices rising by around 3 percent and wages increasing only about 2 percent, households face an annual shortfall of roughly 32,000 yen; the subsidies will offset only part of that gap.
Third, roughly 6 trillion yen in grants will be distributed to local governments, allowing each municipality to decide how the funds will be used, from local price relief to wage support for small and mid-sized firms or assistance for hospitals and nursing facilities. While the approach gives localities flexibility, critics argue it shifts a national policy burden to local governments and may not always result in consistent price relief. Differences in local decisions could lead to disparities in support, and in some areas the funds might not be used for price measures at all.
Another major question is the government’s plan to accelerate domestic investment in 17 strategic sectors to reduce dependence on overseas suppliers for key materials and technologies. While framed as part of economic security, shifting production to Japan inevitably raises costs, given higher labor and land expenses. Strengthening domestic supply chains may protect strategic industries, but it could also push prices higher. Policymakers will be forced to weigh economic security against the goal of stabilizing prices.
The GDP results released on Monday tie into this broader debate. While Japan logged five consecutive quarters of real growth, the latest data points to weakening momentum. Corporate earnings and the stock market remain strong, aided in part by the weak yen, but the real economy shows signs of strain. With inbound tourism uncertain amid rising geopolitical tensions between Japan and China, concerns are growing about a possible cooling of demand.
Kiuchi cautioned against overreacting, saying the latest contraction likely reflects temporary fluctuations and does not indicate a sharply worsening economy. Japan’s long-term real growth rate has remained around 0.5 percent or less for years, and the overall trend has not changed significantly. He added that the situation does not warrant aggressive emergency fiscal spending.
Yet excessive reliance on supplementary budgets carries risks. While the government hopes that large-scale spending will spur activity and lift growth, Kiuchi says a negative scenario cannot be ruled out. If fiscal credibility erodes, the yen could weaken further, driving up import costs and exacerbating inflation. In other words, spending heavily to tackle inflation could paradoxically worsen it.
Markets have already reacted. Yields on 10-year government bonds rose on Monday amid expectations that expanding fiscal spending will worsen Japan’s debt burden. Commentators warn that without restoring public confidence in the nation’s long-term outlook, households will hesitate to spend, and the economy will struggle to regain momentum. Some analysts argue that interest rates should be raised to normalize conditions rather than relying on repeated layers of subsidies.
Yen depreciation has accelerated since Takaichi took office, driven by concerns over fiscal deterioration and expectations that interest rates will remain low. As Japan relies heavily on imported materials, a weaker yen directly feeds into higher prices. This dynamic raises a fundamental contradiction: can the government deliver meaningful price relief without addressing yen weakness?
The Bank of Japan’s ultra-low interest rate policy remains unchanged, even though raising rates would help counter yen depreciation. With the Cabinet set to finalize its policy package on Friday, questions remain over how the administration will reconcile price relief with the structural pressures driving inflation.
Source: MBS
