Key facts
- Japan's cabinet approved a ¥3.1 trillion ($19 billion) supplementary budget.
- The budget will be funded by deficit-financing bonds.
- A ¥2.5 trillion contingency reserve is created to subsidize commodity price rises, initially targeting gasoline.
- The government aims to offset new bond issuance with stronger tax revenues and debt cancellation.
- The spending is framed as a response to inflationary pressures from the Middle East conflict.
Japan's cabinet has approved a ¥3.1 trillion ($19 billion) supplementary budget, to be funded entirely through deficit-financing bonds, aimed at subsidizing fuel and utility costs. The package includes a ¥2.5 trillion contingency reserve, with initial priority given to subsidizing gasoline prices and potentially utility bills, in response to inflationary pressures stemming from the Middle East conflict and potential disruptions in the Strait of Hormuz. The government projects that overall calendar-year bond supply will remain unchanged by cancelling some debt approved under the previous fiscal year's budget and anticipating stronger tax and non-tax revenues. Prime Minister Sanae Takaichi's administration views this spending as a necessary measure against the risk of a prolonged regional crisis impacting energy costs. Separately, Japan's services sector activity stagnated in May, with the PMI falling to 50.0, ending a 13-month growth streak due to surging costs and dampened demand. Output prices saw their highest inflation in 12 years as providers passed on increased expenses. This fiscal development occurs as USD/JPY approaches the 160 per dollar level, which previously prompted intervention, with the Finance Minister issuing a verbal warning about potential market responses. The combination of a widening fiscal deficit, persistent energy import costs, and the Bank of Japan's cautious approach to interest rates creates a challenging backdrop for the yen, potentially exacerbating the cost of energy imports.