The Takaichi cabinet approved a record-breaking stimulus package totaling 42.8 trillion yen (US$273.77 billion) on Friday, marking the largest fiscal expansion in Japan since the Covid-19 pandemic. The package, which includes a 17.7 trillion yen ($113.21 billion) supplemental budget, is designed to tackle rising living costs, invest in strategic sectors, and increase defense spending.
Prime Minister Sanae Takaichi announced the plan, emphasizing that the package is intended to support economic growth while maintaining fiscal responsibility. The supplemental budget will be submitted to the Diet during the current session, with the total figure—including loan guarantees and non-budgetary measures—reaching 42.8 trillion yen ($273.77 billion).
“This is a carefully calibrated stimulus aimed at protecting households from rising costs, boosting key industries, and reinforcing our national security,” Takaichi said during the announcement. She stressed that debt issuance for fiscal year 2025 would remain lower than in fiscal year 2024, signaling a cautious approach to fiscal expansion.
The stimulus package centers on three core priorities:
Relief from Rising Living Costs: With inflationary pressures continuing to affect Japanese households, the government has included tax cuts and subsidies aimed at mitigating the impact of higher energy, food, and transportation costs.
Strategic Investments in Priority Sectors: The Takaichi administration is directing substantial resources toward industries deemed crucial for Japan’s long-term competitiveness, including shipbuilding, artificial intelligence (AI), and semiconductor production. These investments reflect Japan’s ongoing efforts to secure its technological edge in an era of global economic uncertainty.
Defense Spending: The package also includes a significant boost in defense expenditures, raising total defense spending for fiscal year 2025 to 2% of GDP. This increase aligns with Japan’s broader security strategy, amid intensifying regional tensions in the Indo-Pacific.
According to reports by Nikkei, the final size of the stimulus package was larger than initially proposed by the Finance Ministry. Takaichi’s government, working in coordination with both ruling and opposition parties, rejected the ministry’s original draft in favor of a more ambitious plan, incorporating additional tax relief measures and subsidies that expanded the overall headline figure.
Despite the scale of the stimulus, Takaichi sought to reassure markets that her government is pursuing responsible fiscal policy. Finance Minister Katayama Satsuki reiterated that Japan is “naturally” contemplating intervention to address the yen’s recent slide against the dollar, signaling an active role in stabilizing the currency amid heightened economic uncertainty.
The government’s messaging reflects an awareness of the delicate balance between stimulating the economy and maintaining fiscal sustainability. As preparations for the fiscal year 2026 budget proceed, the Takaichi administration is expected to engage continuously with markets to ensure that its expansionary policies are not viewed as inflationary or detrimental to the yen’s value.
The stimulus package announcement comes amid evolving dynamics within Japan’s ruling coalition. On November 21, Liberal Democratic Party (LDP) and Ishin no Kai policy officials met to discuss a proposed framework for reducing the number of seats in the lower house of the Diet. While the parties reportedly agreed on moving forward with legislation, Ishin no Kai has expressed frustration over what it perceives as the LDP’s cautious and ambiguous approach.
Ishin co-leader Yoshimura Hirofumi emphasized the need for clear timelines and concrete details on the number of seats to be cut, indicating that prolonged delays could test the coalition partnership. Nevertheless, observers note that a split between the LDP and Ishin remains unlikely in the short term, even as debates over electoral reform continue.
Opposition parties have reacted cautiously to the LDP-Ishin proposal. Democratic Party for the People (DPFP) leader Tamaki Yūichirō signaled a potential willingness to co-sponsor seat reduction legislation, but broader opposition engagement remains lukewarm. The outcome of these negotiations will be closely watched, given their implications for Japan’s electoral landscape ahead of upcoming elections.
Geopolitical concerns are also shaping the Takaichi administration’s agenda. Beijing announced on November 21 that it is suspending bilateral talks on Japan’s beef exports—a process that has been stalled since 2001 over concerns about bovine spongiform encephalopathy (BSE), also known as mad cow disease.
China has framed the suspension within the context of bilateral security concerns, signaling that progress on trade ties is contingent on Japan clarifying its stance on regional security issues. Specifically, Beijing has requested that Takaichi retract remarks regarding Japan’s potential participation in responding to a Taiwan contingency.
While Takaichi has not issued a retraction, Chief Cabinet Secretary Kihara Minoru stated that the prime minister will refrain from speaking hypothetically about a Taiwan contingency to avoid “inviting confusion.” The development underscores the fragility of Japan-China relations amid rising tensions in the Taiwan Strait and broader Indo-Pacific security concerns.
Domestically, the Takaichi administration has achieved a significant milestone with Niigata Governor Hanazumi Hideyo’s approval to restart the Kashiwazaki-Kariwa nuclear power plant. The move is aimed at bolstering energy security and reducing Japan’s dependence on imported fossil fuels, particularly in light of volatile global energy markets. Restarting nuclear reactors also aligns with the government’s broader efforts to balance fiscal stimulus with sustainable energy policy, providing a stable source of electricity to support industrial growth.
Markets are closely monitoring the yen’s performance, as the currency has shown signs of weakening amid global uncertainty. Finance Minister Katayama indicated that the government is ready to intervene if necessary, reflecting ongoing concerns about the impact of currency fluctuations on inflation, trade competitiveness, and investor confidence.
Takaichi’s approach, including her unusually stable approval ratings early in her tenure, suggests a careful political balancing act. The prime minister has maintained a structured schedule without extensive evening work dinners, signaling a measured, disciplined style of governance as her administration navigates multiple domestic and international challenges.
Japan’s decision to raise defense spending to 2% of GDP represents a significant step in its security strategy, especially in the context of an increasingly assertive China and regional uncertainties. The move is consistent with Japan’s ongoing efforts to strengthen its Self-Defense Forces, invest in advanced military technology, and maintain robust deterrence capabilities in coordination with allied partners.
The increase in defense allocations, alongside strategic investments in AI, semiconductors, and shipbuilding, signals that the Takaichi administration views economic and security resilience as mutually reinforcing pillars of national policy. Analysts note that the blend of fiscal stimulus, industrial investment, and defense expansion may be designed to mitigate risks similar to a “Truss shock” scenario, in which sudden policy shifts or market volatility could destabilize economic or currency conditions.
As the Takaichi administration moves into the final stages of preparing the FY2026 budget, policymakers face a complex balancing act: stimulating the economy, addressing cost-of-living pressures, managing Japan’s security posture, and maintaining investor confidence in fiscal sustainability. The ongoing dialogue with markets, coupled with cautious political maneuvering on electoral reform and coalition management, will shape the trajectory of Japan’s economic and geopolitical policy over the coming months.
Prime Minister Takaichi’s government has so far maintained a steady approval rating while navigating domestic political complexities, geopolitical tension with China, and economic headwinds. How effectively her administration leverages this momentum—without provoking inflationary pressures or eroding the yen’s value—will be a key determinant of Japan’s macroeconomic stability and regional influence in the near term.
The record stimulus package marks a bold step in Japan’s post-pandemic recovery strategy, reflecting a government that is simultaneously pragmatic and ambitious. Whether it will successfully balance fiscal prudence with expansive policy goals, and how Japan-China relations will evolve under Takaichi’s cautious diplomacy, remain pivotal questions for policymakers, markets, and the Japanese public alike.
