Japan has approved an economic stimulus package of roughly JPY21.3 trillion ($136bn) in an effort to counter rising living costs and reinforce domestic demand, marking the first major policy initiative under Prime Minister Sanae Takaichi, Kyodo News reports. When combined with anticipated contributions from regional authorities and private-sector investment, the total is expected to reach almost JPY43 trillion, surpassing last year’s intervention.

The package is designed to bolster the world’s fourth-largest economy at a time of uncertainty over the impact of higher US tariffs and persistent price pressures on households. Alongside short-term relief to temper inflation, the government intends to channel funds into sectors viewed as strategically important, including shipbuilding and artificial intelligence, to strengthen industrial resilience and enhance long-term growth potential, Kyodo adds.

Expectations of large-scale spending have already unsettled financial markets, prompting a weakening of the yen and a sell-off in Japanese government bonds amid renewed scrutiny of the country’s strained public finances. Japan’s debt burden remains the heaviest among advanced economies, exceeding twice the size of its GDP.

To finance the measures, the government will prepare an additional budget of JPY17.7 trillion for the current fiscal year, aiming for passage before the end of the Diet session in December. This exceeds the previous year’s supplementary funding and underscores Takaichi’s willingness to embrace expansionary fiscal policy. Supplementary budgets have stayed above JPY10 trillion in recent years, far higher than levels seen before the pandemic.

Although further bond issuance is planned, the total volume of debt sold this fiscal year is expected to remain below last year’s JPY42.1 trillion. Government projections suggest the measures will temporarily reduce consumer prices and lift real GDP by an estimated JPY24 trillion, equivalent to an annualised rise of around 1.4%.

Economists remain divided on the package’s likely impact, with some cautioning that stimulating demand in an inflationary environment could push prices higher and weigh on household budgets.

Measures include child allowances funded by roughly JPY400bn in central government spending, as well as locally distributed vouchers for everyday purchases. The package also accommodates the fiscal effects of scrapping a temporary fuel levy and raising the tax-free income threshold. In response to elevated food costs, JPY2 trillion will be directed to municipalities to support local assistance schemes.

Further funding of about JPY500bn has been earmarked for electricity and gas subsidies during the first quarter of next year, intended to ease household energy bills by an estimated JPY7,000 over the period.