• Kyodo, Bloomberg

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Japan has decided to issue new government bonds worth ¥22.1 trillion ($192 billion) to fund an extra budget for the current fiscal year through next March that will help finance an economic stimulus package amid the COVID-19 pandemic approved last week, according to sources close to the matter.

The envisaged supplementary budget of ¥31.6 trillion, which is expected to be approved by the Cabinet on Friday, will be used mainly for coronavirus measures and also securing a stable supply of semiconductors, the sources said Wednesday.

The issuance of the government bonds means most of the extra budget will be financed by debt, adding a further blow to the country's fiscal health.

The new bond issuance will cover the shortfall in financing the extra budget, even as tax revenue for fiscal 2021 is expected to increase by ¥6.4 trillion from the previous projection and the government also plans to use ¥6.1 trillion that was carried over from the fiscal 2020 budget.

Some analysts have questioned the need for so much spending now, given that the worst of the pandemic appears over and the economy was forecast to rebound on its own.

"This is big but not totally unexpected given the size of the economic package,” said Chotaro Morita, chief rates strategist at SMBC Nikko Securities in Tokyo. "The question is how they will spend this much money.”

Kishida, who had been known for being fiscally cautious, surprised investors last week by unveiling a record fiscal package of ¥56 trillion, following a report days earlier that the economy shrank last quarter for the fifth time in eight quarters.

Still, with vaccination rates now over 75% and restrictions on economic activity largely lifted, the recovery already looked poised to pick up.

At the same time, the government failed to spend more than ¥30 trillion it budgeted for stimulus last year, suggesting that it may be difficult to inject all of the new money into the economy quickly.

New borrowing will add to the developed world’s heaviest government debt burden. Even without the latest stimulus factored in, the International Monetary Fund calculates that Japan’s government debt will reach 257% the size of GDP in 2021.

"This is probably the last opportunity for an extra budget before next year’s national election — that’s one of the main reasons for its size,” said SMBC’s Morita. "Depending on how the money is used, doubt over Japan’s fiscal management could grow among credit ratings firms.”

Under the planned extra budget, about ¥5 trillion will be allocated in subsidies for restaurants and bars that complied with authorities' requests to cut operating hours or temporarily shut down under either the COVID-19 state of emergency or quasi-emergency.

About ¥2.8 trillion will be used for aiding small companies suffering from the pandemic under a plan to provide financial aid of up to ¥2.5 million each for such firms.

As part of Kishida's policies to beef up the nation's economic security, ¥617 billion will be allocated to support computer chip-making companies. Of that figure, ¥400 billion will be used to aid Taiwan Semiconductor Manufacturing Co. in building a new factory in Kumamoto Prefecture.

Separately, ¥110 billion will be given to promoting research and development projects for next-generation semiconductors.

As for measures to tackle rising crude oil costs, ¥80 billion will aid oil wholesalers when gasoline prices surpass a certain level.

About ¥268.5 billion will be used for resuming the government's Go To Travel subsidy program designed to prop up the pandemic-hit tourism sector.

Since the program was suspended nationwide in December following a spike in new virus cases, the unused portion of its budget allocation from fiscal 2020 will be used as well.

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