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Japan’s cabinet approved a ¥21.3 trillion ($135 billion) supplementary budget on Thursday, the country’s largest since the pandemic, as bond yields surged to their highest levels since 2008 and the yen fell to its weakest point against the dollar this year.
Prime Minister Sanae Takaichi said the spending package, which includes energy subsidies, child payments, and defense funding, was designed to address inflation that has exceeded the Bank of Japan’s 2% target for 43 consecutive months.
The cabinet decision, taken in Tokyo on Thursday, marks Japan’s largest extra-budget initiative since the pandemic and reflects the government’s attempt to manage voter frustration over high prices. As investors absorb the scale of the Japan Stimulus Package, bond yields have jumped and the yen has weakened, signaling early market anxiety.
The Japan Stimulus Package includes ¥17.7 trillion ($112 billion) in general account spending—27% higher than what the previous administration approved last year.
“We’ve put together this package to protect livelihoods, and particularly to respond quickly to the problem of inflation,” Prime Minister Takaichi said, underscoring the urgency behind the government’s push.
Inflation in Japan has exceeded the Bank of Japan’s 2% target for 43 consecutive months, the longest stretch since 1992. The Japan Stimulus Package aims to soften this pressure through direct support for households, energy subsidies, regional funding, and a wide range of social and security investments.
A central feature of the Japan Stimulus Package is the ¥11.7 trillion allocated for direct price relief measures. This includes a ¥7,000 subsidy for household gas and electricity bills over a three-month period ending in March.
Families will also receive a one-time ¥20,000 payment per child, while regional governments will get ¥2 trillion in additional assistance.
Economist Saori Tsuiki of Mizuho Research & Technologies said political dynamics influenced the final size of the plan. “If the larger amount sends an unintended message to markets or overseas and ends up adding to yen-weakness risks, we may have to discount the expected economic impact of the package,” — Saori Tsuiki, Mizuho Research & Technologies.
The government expects these relief steps to lower inflation by an average of 0.7 percentage point between February and April. The Japan Stimulus Package also includes ¥1 trillion to abolish the gasoline tax and ¥1.2 trillion to raise the income-tax-free threshold, both measures supported by opposition parties and newer coalition partners.
Beyond consumer support, ¥1.7 trillion is earmarked for strengthening defense and diplomatic capacity. Of this, ¥1.1 trillion will help Japan reach its defense-spending target of 2% of GDP this fiscal year, a goal moved forward by two years. In addition, ¥7.2 trillion will fund crisis-management investment in key areas the government deems vulnerable.
Market reaction to the Japan Stimulus Package was swift. Yields on five- and ten-year government bonds reached their highest levels since 2008, while longer-term yields climbed further. The yen fell past 157 per dollar—its weakest point since January—raising concerns among policymakers.
Analyst Rain Yin of S&P Global Ratings noted the long-term fiscal pressures that will shape investor sentiment.
“It is clear that Japan will face higher spending pressure on social security, interest payment and national defense for some time,” — Rain Yin, S&P Global Ratings.
Despite these warnings, public sentiment appears to support the Japan Stimulus Package. An ANN poll showed Takaichi’s approval rating rising 8.8 points to 67.5%, with respondents expressing optimism about its economic impact.
The package also includes ¥700 billion in reserve funds for natural disasters and wildlife-related incidents—particularly bear encounters, which have increased in rural regions. Takaichi maintains that new bond issuance will remain below last year’s ¥42.1 trillion. “We’ve given ample consideration to fiscal sustainability as well,” she said.
Government estimates suggest the Japan Stimulus Package could lift GDP growth by an average of 1.4 percentage points annually over the next three years. The economy contracted during the July–September quarter, partly due to U.S. tariff impacts, making the stimulus critical to counteracting external shocks.
The Japan Stimulus Package also strengthens the financial positions of the Japan Bank for International Cooperation and Nippon Export and Investment Insurance, both essential to managing a $550 billion investment fund tied to Japan-U.S. tariff agreements.
Looking ahead, the government plans to secure new funding for strategic sectors including shipbuilding, quantum technology, and critical minerals—areas seen as central to national and economic security.
As Japan navigates inflation, market volatility, and evolving geopolitical pressures, the Japan Stimulus Package stands as the centerpiece of Takaichi’s economic strategy—one that balances immediate relief with long-term structural priorities.
