Photo/Illutration Prime Minister Fumio Kishida speaks during a news conference at his office building in Tokyo on Nov. 2. (Pool Photo via AP)

Prime Minister Fumio Kishida announced Thursday a stimulus package of more than 17 trillion yen ($113 billion) that includes tax breaks and benefits for low-income households, a plan criticized by some observers as populist spending that would worsen Japan’s national debt.

Kishida said his priorities are to overcome deflation and to put the economy on a growth track. Tax revenues will increase only when the economy grows and lead to fiscal health, he told a news conference, explaining the package endorsed by his Cabinet earlier in the day.

The government will fund part of the spending by compiling a supplementary budget of 13.1 trillion yen ($87 billion) for the current fiscal year.

Including spending by local governments and state-backed loans, the size of the package will total 21.8 trillion yen.

“Japan’s economy is now on the brink of exiting from deflation. It would be more difficult to do so if we miss out this chance, ” he said. “I’m determined to boost the disposable income, to lead to expanded growth and to create a virtuous cycle.”

Pay hikes have yet to outpace inflation, Kishida said, noting that as a key challenge.

The package includes a temporary tax cut of 40,000 yen ($266) per person from next June and 70,000 yen ($465) payouts to low-income households as well as subsidies for gasoline and utility bills.

All combined, the plan is estimated to boost Japan's gross domestic product (GDP) by about 1.2 percent on average, according to a government estimate.

The effect of gasoline and utility subsidies will push down overall consumer inflation by about 1.0 percentage point from January and April next year, it said.

Last year, his government already earmarked a nearly 30-trillion yen ($200 billion) supplementary budget to fund an earlier economic package aimed at fighting inflation.

Takahide Kiuchi, executive economist at the Nomura Research Institute, said the package's effect on the economy will be limited because temporary tax cuts and payouts tend to go to savings. Such measures won't change consumer behavior and will have limited impact on the mid- to long-term economy, he said.

Kiuchi said the latest measures look like “an attempt to please everyone.” The government earlier called for “normalizing” the increased spending during the pandemic that worsened Japan's government debt, but the economic package seems to be a quick reversal of the policy, he said.

The rising cost of living is partly blamed for pushing down Kishida's approval ratings, piling pressure on the prime minister to take steps to ease the pain on households.

Analysts doubt whether the roughly 5 trillion yen to be spent on tax cuts and payouts would do much to boost consumption and Japan's economic growth.

Kiuchi, a former Bank of Japan board member, expects the measures to lift GDP by just 0.19% for the year.

"It's a policy that isn't very cost effective," he said. "With Japan's output gap having turned positive in April-June, the economy doesn't need a stimulus package in the first place."

The package also includes measures to beef up supply chains and key technology, such as tax breaks to firms that invest in areas considered strategically important.

The spending may force the government to issue more bonds and add to Japan's ballooning public debt which, at twice the size of its economy, is the biggest among major economies.

Opposition lawmakers have questioned the use of tax cuts as inflation-relief measures, partly because it takes time to legislate them.

Akira Nagatsuma, policy research chairperson of the main opposition Constitutional Democratic Party of Japan, accused Kishida of suddenly switching to tax cuts to cover up his perceived support for a tax increase to fund surging defense spending over the next five years, under a new security strategy adopted in December.

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