Japan’s New Mega-Stimulus Tests The Limits Of Debt-Fueled Rescue

Japan’s new government has launched a ¥21.3 trillion (about $135 billion) stimulus package in a fresh attempt to revive an economy stuck between weak growth and stubborn inflation.

The plan, pushed through by recently installed prime minister Sanae Takaichi, mixes tax cuts with targeted subsidies for families and energy bills, even as Japan already carries the heaviest public debt burden in the developed world.

Roughly ¥17.7 trillion will come as direct spending and about ¥2.7 trillion as temporary tax cuts. Families will receive one-off payments of ¥20,000 per child, rice or food vouchers worth ¥3,000 per person, and extra support to offset electricity, gas and gasoline costs.

Tokyo claims the package will lift output by around ¥24 trillion and add about 1.4% to annual growth over the coming years. The timing is politically shrewd but economically risky.

Japan’s economy shrank at an annualized pace of around 1.8% in the third quarter, while core inflation hovers near 3%, above the central bank’s 2% target. The country is also feeling the squeeze from U.S. tariffs and a deteriorating relationship with China.

What once looked like a painless mix of cheap money and quiet deficits is now colliding with higher global interest rates and markets that ask harder questions.

Japan has used big packages before—from “Abenomics” in the early 2010s to colossal COVID-19 measures—but this is the largest peacetime effort since the pandemic. The difference now is that debt already stands around 230% of GDP, roughly double U.S. levels and far above European peers.

Investors have pushed 10-year government bond yields to their highest levels in nearly two decades, the yen trades near its weakest point in years, and the Nikkei has retreated from record highs as doubts grow over unfunded promises.

Japan is not about to default. Its debt is mostly held at home and denominated in its own currency. But this new package underlines a hard truth: without serious structural reforms—on productivity, demographics and regulation—endless stimulus risks becoming a habit that slowly erodes confidence, in Japan and in a world already drowning in public debt.