Japan’s new coalition eyes big spending, but not Abenomics 2.0

Reuters:

TOKYO, Oct 23 – The new junior party in Japan’s ruling coalition is likely to give Prime Minister Sanae Takaichi the green light she needs for a big spending package, but will stop short of supporting a revival of Abenomics-style fiscal and monetary policies.

Takaichi made history this week becoming the country’s first female prime minister after she formed a new ruling bloc between her Liberal Democratic Party and the Japan Innovation Party, known as Ishin.

The partnership brings Ishin, which supports tax cuts and wealth distribution but focuses mainly on cutting red tape and wasteful spending, into government for the first time.

Ishin’s preference for small government contrasts with opposition parties that call for payouts and tax breaks, and may serve as a counter-weight to Takaichi’s bias towards big spending.

“Ishin advocates small and efficient government in contrast to Takaichi, who has championed expansionary fiscal and monetary policy,” said Takahide Kiuchi, an economist at Nomura Research Institute. “Cooperation with Ishin could temper Takaichi’s policy instincts and lead to a more balanced economic approach.”

To be sure, Takaichi is seen deploying a package of spending that exceeds former premier Shigeru Ishiba’s 13.9-trillion-yen plan compiled last year, government sources have told Reuters.

The package will include measures agreed upon by the two parties such as gasoline tax cuts, subsidies to curb utility bills and tax breaks for households.

But Ishin has backed down on its earlier calls to temporarily freeze the consumption tax for food, heeding ruling party warnings that it would put too much strain on Japan’s long-term finances.

Ishin’s co-head Fumitake Fujita said while his party and LDP shared the need to underpin growth with expansionary fiscal policy, Takaichi agreed to push through spending reforms.

“Neither I nor Takaichi is of the view that Japan can resort to reckless spending,” Fujita told a television interview on October 16.