By Leika Kihara and Daniel Leussink
TOKYO (Reuters) -Japan said on Friday it would spend $200 billion on an economic stimulus package meant to tame inflation and cushion the economic blow from rising raw material costs.
The government's announcement came hours after the central kept interest rates ultra-low, a double-barrelled signal that Tokyo will continue pouring massive fiscal and monetary stimulus into the world's third-biggest economy while other economies are tightening policy.
Fiscal spending under the package will total 39 trillion yen ($260 billion), funded by an extra budget of 29.6 trillion yen ($201 billion). The government expects the spending to boost Japan's gross domestic product (GDP) by 4.6%.
"We'll ensure Japan doesn't experience the kind of 10% inflation seen in the United States and Europe," Prime Minister Fumio Kishida told a news conference. "We decided to directly target energy prices, which are the main factors behind recent rising inflation."
With his approval ratings plunging to levels that could make it difficult for him to carry out his agenda, Kishida has been under strong pressure from ruling party lawmakers to ramp up spending to ease the pain on households and retailers.
The stimulus includes subsidies to cut household electricity bills 20% from January to September. It will issue coupons to families with newborns and extend a subsidy to curb gasoline prices.
These and other steps will suppress Japan's consumer price inflation by around 1.2 percentage points between January and September next year, according to a government estimate.
TRUST IN YEN QUESTIONED
Takahide Kiuchi, executive economist at Nomura Research Institute, warned that ramping up spending when the economy is in fairly good shape could pose a danger for Japan, which has the biggest public debt among major economies.
"The Bank of Japan's extraordinary monetary easing and the government's expansionary fiscal spending create a policy mix that erodes market trust in the yen," said Kiuchi, a former BOJ board member. "This could accelerate unwelcome yen falls."
Finance Minister Shunichi Suzuki said the government will compile an extra budget in time to pass it through parliament by the end of this year.
Consumers expressed doubts about the impact of the measures, with some calling for more drastic steps such as reducing the 10% consumption tax.
"If it goes back to 3%, the economy will very much be stimulated, but I think they can aim for 8%," said Takashi Sato, a 55-year-old company executive. "Ideally, I would like it to be 5% because then we would probably see GDP growth."
Analysts expect the government to issue bonds to fund some of the spending, adding to Japan's already huge debt pile.
Kishida defended the BOJ's ultra-loose monetary policy, which has been blamed for raising import costs by pushing the yen to 32-year lows.
"Monetary policy must be decided taking into account not just currency moves, but economic and price developments as well as the impact on public's interest rate burden," the prime minister said.
Even as the BOJ has stuck with its zero-rate policy, encouraging a weaker yen as the Federal Reserve raises U.S. rates, the government has intervened in the currency market to support the yen.
($1 = 147.8100 yen)
(Reporting by Leika Kihara and Daniel Leussink, Additional reporting by Yoshifumi Takemoto, Tetsushi Kajimoto, Rikako Maruyama and Kohei Miyazaki; Editing by Christopher Cushing and Ana Nicolaci da Costa)