Photo/Illutration Itsunori Onodera, center, policy chief of the ruling Liberal Democratic Party, shakes hands with his counterparts in the opposition Democratic Party for the People and coalition partner Komeito after signing agreement on an economic stimulus package on Nov. 20. (Asahi Shimbun file photo)

Japan is considering spending 13.9 trillion yen ($89.7 billion) from its general account to fund a new stimulus package aimed at mitigating the impact of rising prices on households, according to a government document reviewed by Reuters on Thursday.

The proposed spending, exceeding the 13.2 trillion yen allocated for last year's economic stimulus, is set to exacerbate Japan's already strained public finances, with debt currently twice the size of its economy.

The package also includes around 8 trillion yen for government investment and lending, as well as local government spending, putting the overall package at 39 trillion yen when private funding is included, the document showed.

The figures were also confirmed by three other government and ruling party sources, who declined to be identified as the matter has not been made public.

The stimulus package will include 30,000 yen ($193) to low-income households that are exempt from residential taxes and 20,000 yen per child for households with families, according to sources familiar with the matter.

Major hurdles over the package were cleared on Wednesday after Japan's ruling coalition agreed with a key opposition party on the draft of the package.

"I'm not sure whether the economic package of this size is necessary now, when there are emerging signs that private consumption is picking up and real wage growth is turning positive," said Takayuki Sueyoshi, senior economist at Daiwa Institute of Research.

Sueyoshi also said that Japan's goal of running a primary budget surplus in the next fiscal year would now be hard to fulfill.

The government estimated in July that Japan would achieve a primary budget surplus of 0.8 billion yen in fiscal 2025, which means tax revenues will slightly exceed expenditures.

In the past, Japan has used supplementary budgets, typically worth a few trillion yen, to deal with one-off, emergency spending, such as disaster relief. That changed in 2020, when the size ballooned to 73 trillion yen to combat the COVID-19 pandemic.

Since then, Japan has continued to compile outsized, largely debt-funded, supplementary budgets. Last year, nearly 9 trillion yen of the 13-trillion-yen spending was funded by new debt.

The scale of new bonds Japan would need to issue remains unclear. Last year, the government issued close to 9 trillion yen in bonds for the supplementary budget.

The International Monetary Fund has warned that Japan must fund any additional spending plans within its budget rather than issue more debt, urging the government to get its fiscal house in order as the Bank of Japan shifts away from its decade-long stimulus program.

The monetary policy shift means the government can no longer rely on ultra-low borrowing costs and on the central bank to effectively bankroll debt.

The Finance Ministry sets the assumed interest rate for the year starting next April at 2.1%, up from the current year's 1.9%, boosting debt-servicing costs for interest payments and debt redemption to 28.9 trillion yen from 27 trillion yen for the current year.

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