According to Reuters, Japan’s new Prime Minister Sanae Takaichi just announced a massive 21.3 trillion yen ($135 billion) stimulus package on Friday. That’s equivalent to 3.5% of Japan’s entire economic output and more than a quarter larger than last year’s spending. The package includes subsidies for electricity and fuel, cash handouts to families with children, and eliminating the gasoline tax. The government claims these measures will lower headline inflation by 0.7 percentage points from February to April next year. But here’s the catch: this massive spending spree might actually make inflation worse instead of better.
The inflation paradox
So the government wants to fight inflation by… spending more money? That seems counterintuitive, right? Basically, when you flood the economy with cash through subsidies and handouts, you’re putting more purchasing power into people’s hands. And more money chasing the same amount of goods typically means higher prices, not lower ones. The Cabinet Office might think their energy subsidies will bring down inflation numbers temporarily, but the overall effect of this massive stimulus is likely to be inflationary. It’s like trying to put out a fire by throwing gasoline on it – the short-term relief might be real, but you’re making the bigger problem worse.
The currency crunch
Here’s where things get really messy. To fund this $135 billion splurge, the government needs to issue more bonds. And when Japan floods the market with more debt, it puts downward pressure on the yen. The currency has already fallen 6.7% against the dollar since Takaichi became party leader. Finance Minister Satsuki Katayama is already “alarmed” by currency moves and threatening intervention. But a weaker yen makes everything Japan imports more expensive – including the oil and gas that power the country. So those energy subsidies? They might just get canceled out by higher import costs. It’s a vicious cycle that could leave households no better off.
The rate hike risk
The real irony here is that Takaichi’s stimulus could force the very outcome she wants to avoid: interest rate hikes. If this spending package does fuel inflation, the Bank of Japan will face mounting pressure to raise rates. Higher rates would strengthen the yen and help control inflation, but they’d also increase the government’s own borrowing costs. Takaichi specifically wants to delay rate hikes to keep funding costs low, but her policies might make that impossible. It’s a classic case of unintended consequences – the cure might end up being worse than the disease.
Political fallout
This isn’t just an economic miscalculation – it’s a political gamble too. The Liberal Democratic Party’s popularity is already waning, and if this stimulus backfires by making inflation worse, their parliamentary rivals will be “sharpening their knives.” Families struggling with higher prices want real relief, not economic experiments that might blow up in their faces. When you’re dealing with complex economic systems, sometimes the obvious solution – throw money at the problem – turns out to be exactly the wrong approach. You can follow the analysis on Bluesky or X for more real-time commentary. For deeper financial insights, try Breakingviews for free.
