Japan's Takaichi Cabinet Approves $135B Economic Stimulus Package: Impact & Risk Analysis

Japan’s Takaichi cabinet approved a ¥21.3 trillion ($135B) economic stimulus package on November 21, 2025 [1]. The package addresses Japan’s slowing economy—Q3 2025 GDP shrank by 1.8% annualized (first drop in six quarters) [3]—and persistent inflation (3% in October, above BOJ’s 2% target) [3]. Key components include:

• ¥11.7 trillion for household relief (tax cuts, utility subsidies: ~¥7k/household for 3 months, gasoline tax elimination) [1][3]
• ¥7.2 trillion for growth investments (semiconductors, AI, shipbuilding) [1][3]
• Defense measures (10-year shipbuilding fund, 2% GDP defense spending target by FY27) [3]
  Funding sources include higher tax revenues and additional government bonds (expected >¥6.69T vs last year) [2]. Market reactions were mixed: yen weakened to 157.31 per dollar [2] and 10-year JGB yields rose to 1.817% (highest since 2008) [3].

1. Cross-Domain Trade-Offs
   : The stimulus aims to boost short-term consumer spending while investing in long-term growth, but risks worsening inflation (already above target) [3]. This creates a policy dilemma for the BOJ (balancing growth vs price stability) [0].
2. Sectoral Alignment
   : Growth investments in semiconductors and AI align with global tech trends, while shipbuilding/defense spending reflects geopolitical priorities [3].
3. Fiscal Sustainability
   : Despite claims of responsible funding, Japan’s high debt-to-GDP ratio (among developed nations) raises concerns about long-term fiscal health [0][2].

• Fiscal Sustainability
  : Additional bond issuance may exacerbate Japan’s debt burden [2]. Investors should monitor details of bond sales [0].
• Inflationary Pressures
  : Stimulus could increase demand-pull inflation, worsening the cost-of-living crisis [3].
• Market Volatility
  : Yen depreciation raises import costs, while higher JGB yields increase government borrowing costs [2][3].

• Targeted Sectors
  : Semiconductors, AI, and shipbuilding industries may benefit from directed investments [1][3].
• Short-Term Growth
  : Household relief measures could boost Q1 2026 consumer spending [3].
• Defense Sector
  : Shipbuilding and defense equipment companies may see increased demand [3].

• Package Size
  : ¥21.3T ($135B) [1]
• Timing
  : Supplementary budget to pass by year-end [2]
• Political Context
  : Takaichi’s LDP-Japan Innovation Party minority government [3]
• Market Reactions
  : Yen at 157.31/dollar, 10-year JGB yield at 1.817% [2][3]
• Economic Context
  : Q3 GDP contraction (-1.8% annualized), October inflation (3%) [3]