Japan ready to compile extra budget to cushion US tariff blow, PM Ishiba says

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By Leika Kihara

TOKYO (Reuters) -Japanese Prime Minister Shigeru Ishiba said on Monday the government is ready to compile an extra budget to cushion the economic blow from U.S. tariffs, a move that would add strain to the country’s already worsening finances.

After suffering a stinging defeat in last month’s upper house election, Ishiba’s minority coalition is under pressure to heed opposition parties’ demand to boost spending and cut Japan’s sales tax.

“We will compile one if necessary, taking into account discussions with other parties,” Ishiba told parliament when asked by an opposition lawmaker whether the government would compile an extra budget that includes tax cuts.

If the government were to compile a stimulus package, an extra budget to fund the spending would be submitted to an extraordinary parliament session likely to be convened in September.

Japan’s trade deal struck with President Donald Trump last month lowers U.S. tariffs for imports of goods including its mainstay automobiles, easing the pain for the export-reliant economy.

But there is no clarity on when U.S. tariffs for automobiles and auto parts will be cut to 15% from the current 25%, clouding the outlook for Japan’s fragile recovery.

Compiling an extra budget has become a regular practice in Japan as politicians call for increasing spending to support the economy, keeping its fiscal policy loose even as other countries rolled back crisis-mode spending after the COVID-19 pandemic.

Ishiba has not commented on the possible size of an extra budget, but some analysts expect it could reach around 10 trillion yen ($67.68 billion), which would require additional debt issuance.

The extra budget would come on top of a record 115.5 trillion yen budget for the current fiscal year. Of the total, 24.5% is being spent on financing debt. Such deficit funding costs will likely rise further as the Bank of Japan eyes more interest rate hikes, analysts say.

With rising food costs hurting consumption, opposition parties have called for slashing or eliminating Japan’s sales tax rate, which is set at 10% except for 8% for food.

Ishiba, who is regarded as a fiscal hawk, has been cautious about cutting the sales tax, which funds social welfare costs for a rapidly ageing population.

A flurry of big spending packages and ballooning social welfare costs for a rapidly ageing population have left Japan with a debt pile 250% the size of its economy – the highest among major economies.

($1 = 147.7500 yen)

(Reporting by Leika Kihara; Editing by Jamie Freed)