TOKYO: Japanese inflation slowed slightly in October with prices up 2.3 percent on-year, official data showed Friday, as the government readies a huge economic stimulus package. The core Consumer Price Index (CPI), which excludes volatile fresh food prices, was down from 2.4 percent in September and 2.8 percent in August. But it stayed above the Bank of Japan’s key inflation target of two percent, set over a decade ago as part of efforts to boost the stagnant economy.

Japan’s minority government is expected to unveil a 22 trillion yen ($140 billion) stimulus package on Friday, aiming to put more money in consumers’ pockets after the ruling party’s worst election result in 15 years. The stimulus includes energy and fuel subsidies as well as cash handouts for low-income households in the world’s fourth-biggest economy, local media has reported.

“The pace of price increases is expected to accelerate toward the end of (the current fiscal year) as inflation mitigation measures are scaled back,” Taro Saito from NLI said. 

Going forward, “the upward pressure on service prices from wage increases will likely be offset by a slowdown in goods price growth driven by yen appreciation, causing the inflation rate to fall below the Bank of Japan’s two percent target”, he added. The bank’s target has been surpassed every month since April 2022, although policymakers have questioned to what extent that is down to temporary factors such as the Ukraine war. The central bank raised interest rates in March for the first time since 2007 and again in July, in initial steps towards normalizing its ultra-loose monetary policies.

The government plans to unveil a $140-billion stimulus drive aimed at putting more money in consumers’ pockets after the ruling party’s worst election result in 15 years. The October 27 contest saw voters—angry over corruption in the Liberal Democratic Party (LDP) and inflation—deprive new Prime Minister Shigeru Ishiba’s coalition of a majority in parliament’s lower house.

The 22-trillion-yen stimulus bundle includes energy and fuel subsidies as well as cash handouts for low-income households in the world’s fourth-biggest economy, local media reported. The overall impact of the package, set to go before parliament at a later date, is projected to be worth 39 trillion yen when including loans and private-sector investment, the reports said. Ishiba’s cabinet plans to formalize the measures on Friday and push a supplementary budget to pay for them through parliament by the end of the year, Kyodo News said. To win enough lawmakers’ support, Ishiba agreed to include the lifting of an income tax threshold pushed by the opposition Democratic Party for the People (DPP).

The smaller party says this will ease labour shortages and boost consumer spending by encouraging part-time staff to work longer hours and earn more. But critics worry that this will reduce tax revenues by trillions of yen, leaving major holes in the national and local budgets.

Japan already has one of the world’s biggest ratios of national debt to output, with state spending predicted to balloon as its population ages and it struggles to find workers. Tax cuts “must be accompanied by a permanent source of revenue to fill the gap,” said SMBC Nikko Securities economist Yoshimasa Maruyama. “Excessive” loosening of fiscal discipline would lead to higher interest rates in the financial markets, Maruyama said in a research note.

The package comes a year after Ishiba’s predecessor Fumio Kishida, who resigned earlier this year, announced a stimulus package worth 17 trillion yen ($113 billion at the time). Ishiba, 67, has promised to revitalize depressed rural regions and to address the “quiet emergency” of Japan’s shrinking population with measures to support families such as flexible working hours. Going forward, businesses worry that the need to curry favour with opposition parties means Ishiba will avoid reforms needed to improve Japan’s competitiveness. – AFP