Stimulus package large but smaller than reported

The stimulus unveiled today by PM Kishida’s new cabinet was broadly in line with expectations despite inflated headline figures quoted in media reports which we think are padded with loans and recycled funds. There was a case for the package to focus on long-term structural goals such as digitalisation and decarbonisation, as last year’s third supplementary budget did. But instead the new stimulus is geared towards propping up households and business with handouts. While that will give a boost to consumption, spending would be on course for a strong rebound in Q4 and Q1 even without any fiscal handouts. Despite today’s large package, unveiled spending this year is only around half of the spending announced in 2020. But given that government spending will still be far higher than 2019 levels this year, we’d still characterise fiscal policy as expansionary.