New plan, old habits

Japan’s Cabinet, under Prime Minister Sanae Takaichi, approved yesterday a comprehensive economic stimulus package valued at ¥21.3 trillion ($135 billion). This marks the largest such initiative since the COVID-19 pandemic and represents Prime Minister Takaichi’s first major policy move since taking office in October 2025. The package aims to counteract a recent economic contraction (Japan’s GDP shrank by 1.8% annualized in the July-September quarter) and wants to address persistent inflation exceeding the Bank of Japan’s 2% target. It is projected to boost GDP by ¥24 trillion ($155 billion), or 1.4% on an annualized basis, through targeted spending. The three main areas are: (1) addressing rising prices, with one time payments to families to increase the number of births, and reducing taxes to the lower and middle income classes, which is equivalent to pour gasoline to a fire to extinguish it. (2) Investing in growth areas such as AI, semiconductors, complementing it with strategies to counterbalance US tariffs, and (3) increase in defense spending. How are they going to pay for this? The plan will be financed through a supplementary budget, requiring additional government bond issuance estimated at over ¥6.69 trillion (larger than last year’s figure). This adds to Japan’s already massive public debt, which stands at about 250% of GDP. The key part, assuming the parliament approves the package on December 17th, is who will buy the new debt, since the BoJ already owns 50% of all government debt. If they print money (which they will) the Yen will devalue even more, and if they don’t, and sell US treasuries to fund this program, they will have to sell around 11% of their UST holdings (currently around $1.18Tn). That can have a significant impact on U.S. long term yields and will strengthen the Yen, forcing the unwind of the yen carry trade which will put more selling pressure on U.S. assets. New plan, old habits.

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