Japan unveils $708 billion in fresh stimulus with eye on post-COVID growth

TOKYO (Reuters) - Japan announced a fresh $708 billion economic stimulus package on Tuesday to speed up the recovery from the country’s deep coronavirus-driven slump, while targeting investment in new growth areas such as green and digital innovation.

FILE PHOTO: Japanese Prime Minister Yoshihide Suga speaks during a news conference in Tokyo, Japan December 4, 2020. Hiro Komae/Pool via REUTERS

The new package will include about 40 trillion yen ($384.54 billion) in direct fiscal spending and initiatives targeted at reducing carbon emissions and boosting adoption of digital technology.

Policymakers globally have unleashed a wall of monetary and fiscal stimulus to prevent a deep and prolonged recession as the coronavirus closed international borders and sent millions out of work. In the United States, a $908 billion coronavirus aid plan is currently under debate in Congress.

In Japan, the pandemic has forced the government to put its fiscal reform agenda on the backburner, despite holding the industrial world’s heaviest public debt burden, that is twice the size of its economy.

“We have compiled the new measures to maintain employment, sustain business and restore the economy and open a way to achieve new growth in green and digital areas, so as to protect people’s lives and livelihoods,” Prime Minister Yoshihide Suga told a meeting with ruling party executives.

The package, approved by cabinet on Tuesday, would bring the combined value of coronavirus-related stimulus to about $3 trillion - roughly two-third the size of Japan’s economy.

Suga said the fresh stimulus will boost Japan’s gross domestic product (GDP) by around 3.6%.

Japan’s economy, the world’s third-largest, rebounded in July-September from its worst postwar contraction in the second quarter, though many analysts expect a third wave of COVID-19 infections to keep any recovery modest.

Aside from direct fiscal spending, the package included credit guarantees and loan facilities for small firms facing funding strains caused by the pandemic.

The new stimulus also featured steps underlining Suga’s policy priorities eyeing a post-pandemic world, contrary to two previous packages that focused on dealing with the immediate strain on households and business from the pandemic.

Examples include a 2-trillion yen fund to promote investment that helps achieve carbon neutrality by 2050, and 1 trillion yen to accelerate digital transformation.

Lacking, however, were details on how to fund the package.

The government will compile a 20-trillion-yen third extra budget for the current fiscal year, a source told Reuters. It is also seen setting aside money for the package under next year’s budget.

With tax revenues hit by slumping corporate profits blamed on COVID-19, some investors say the government may need to issue 15 trillion yen worth of new bonds to fund the third extra budget alone.

“Japan needs to make a plan for fiscal reform and shift to reconstructing public finance at some point. But now is the time to help firms and households hit by the pandemic,” said Yuichi Kodama, chief economist at Meiji Yasuda Research Institute.

($1 = 104.0200 yen)

Reporting by Tetsushi Kajimoto and Leika Kihara; Additional reporting by Kaori Kaneko and Takaya Yamaguchi; Editing by Tom Hogue, Sam Holmes & Simon Cameron-Moore