The government on Thursday approved a spending package worth 5.5 trillion yen in a bid to offset a tax hike that comes into effect next year and which critics fear will derail Japan’s economic recovery.
The stimulus is loaded with public works spending, including construction projects for the 2020 Tokyo Olympics, rebuilding coastal communities shattered by the 2011 quake-tsunami and updating the country’s aging infrastructure.
Many of Japan’s roads, bridges and water systems date back to the 1960s and 70s and have seen few upgrades since.
The package also includes investment and tax-incentives for business, low-income earner subsidies and assistance for disaster victims.
The spending is expected to impact the world’s third-largest economy to the tune of 18.6 trillion yen including private-sector and local government spending.
Finance Minister Taro Aso said the government would draft a new budget next week to account for the stimulus package, which would not require fresh borrowing.
The spending “should continue” to boost Japan’s economy beyond next year, Aso told reporters Thursday.
The move came as concern grows that April’s sales tax hike—to 8% from 5%—will stall Japan’s recovery that has been achieved by a policy blitz launched by Prime Minister Shinzo Abe.
Economists estimate the impact on households at some 8 trillion yen, dealing a blow to consumer demand just as the economy is picking up.
The scheme, a mix of government spending and central bank monetary easing, has been credited with helping stoke a sharp decline in the yen, in turn boosting exporters, and stoking the best economic growth among G7 nations in the first half of the year.
Abe’s plan also calls for big reforms in the long-laggard economy, including shaking up the labor market and signing free-trade pacts.
But Japan’s sizzling growth—which has earned Abe high approval ratings—slowed in the third-quarter and analysts have warned consumers may close their wallets after the tax hike.
The increase is seen as crucial to shrinking a mammoth national debt. Standing at more than twice the size of the economy, Japan has the heaviest debt burden among industrialised nations.
The International Monetary Fund, among others, has been calling on Tokyo to gets its fiscal house in order.