Japan to Spend $15 Billion on Inflation Aid Ahead of Local Polls

(Bloomberg) — Japan is set to allocate more than 2 trillion yen ($15.1 billion) in additional aid to ease the impact from high inflation ahead of local elections next month.

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The outlays will come from reserve funds already budgeted for the fiscal year ending this month, Economy Minister Shigeyuki Goto told reporters Wednesday. The measures include handouts for low-income households and their children, and support for households that use liquefied petroleum gas, according to documents from the cabinet office.

The additional measures underscore the concern in Prime Minister Fumio Kishida’s ruling coalition over the impact on voters and firms from the strongest inflation in four decades. Economists say the longer-term impact from the measures on prices and Bank of Japan policy is likely to be limited.

“The BOJ will exclude the impact from the fresh measures as they are likely to only last for a short period, like a year,” said Takahide Kiuchi, a former BOJ board member and economist at Nomura Research Institute. “The government is doing this for upcoming local elections rather than for monetary policy.”

The ruling parties are set to face local elections across the country next month, including some by-elections to fill parliamentary seats. Support for Kishida’s government has recently picked up from record lows, partly due to its firm stance on supporting Ukraine. The premier made his first trip to Kyiv this week since Russia’s full-scale invasion.

Still, more action to relieve the impact of soaring inflation may help shore up public approval.

Economy Minister Goto said that of the newly planned measures, 700 billion yen will go toward responding to the rise in energy prices, while 500 billion yen will be used to support low-income households. With other spending, the total amount will add up to over 2 trillion yen.

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Japan’s core inflation hit 4.2% in January, the highest since 1981, with food and energy prices still the main drivers. The gauge is forecast to slow down when the February reading is released Friday, as earlier government price-relief measures cut electricity bills and keep a lid on natural gas costs. The earlier steps didn’t extend to liquefied petroleum gas, which is used more extensively outside Japan’s big cities.

Kiuchi expected the latest measures to shave 0.3 percentage point off consumer prices, while lifting nominal gross domestic product by 0.09%. The government previously estimated the existing measures would suppress inflation by 1.2 percentage point.

The BOJ expects inflation to fall below its 2% target in the year starting in April, and says it needs to keep its monetary easing to anchor inflation above its goal. It had also repeatedly stressed the need for wages to stably keep up with prices for its target to be met.

“For the BOJ, the banking crisis is having a bigger impact than the price outlook,” said Kiuchi, referring to the ongoing crisis over the Silicon Valley Bank and Credit Suisse fallouts. “There’s a good chance that’s going to delay the bank’s timing to shift toward normalization.”

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