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Published : 15 Nov 2025, 11:11 AM
The United States and Japan are both employing a novel inflation-fighting tool: fiscal stimulus.
US President Donald Trump and Japan's Prime Minister Sanae Takaichi are looking to placate angry electorates squeezed by cost-of-living issues. But offering lavish fiscal giveaways to cool inflation is a bit like trying to bring a breaking fire under control by dousing it with gasoline.
Earlier this month, Trump's Republican Party suffered key gubernatorial and mayoral election defeats, where concerns about the high cost of living played a major role.
The White House appears to have heard the electorate loud and clear. The president now seems set on sending a $2,000 check to most US households, a 'tariff dividend' funded via money raised by the cranked-up duties on US imports.
"It's in discussion," Treasury Secretary Scott Bessent said on Wednesday.
But wait, weren't the hundreds of billions of dollars of tariff revenues meant to help cut the budget deficit?
Evidently, that's no longer the priority, something that became clear earlier this year when Trump pushed through his 'One Big Beautiful Bill Act'. The package is jammed full of tax cuts that are expected to add $2.4 trillion to the federal budget deficit over the next decade, according to the non-partisan Congressional Budget Office.
The Trump administration's key priority is clearly growth, meaning it will run the economy hot, even if the price for that is above-target inflation. While White House officials have never said this publicly, they appear to accept that having inflation closer to 3 percent than the Fed's 2 percent target may be worth it to prop up nominal growth.
FISCAL HOUSE DISORDER
It looks like Japan's new prime minister is taking a similar approach.
Rising living costs in Japan were a key factor behind the ruling Liberal Democratic Party's historic election defeat in the summer that led to Takaichi's surprise sweep to power last month.
But instead of seeking to tighten policy to stamp out inflation, Takaichi, like Trump, is advocating loosening the fiscal taps.
Her newly-formed government is preparing an economic stimulus package that will likely exceed last year's $92 billion package. One of its three main aims is to mitigate the impact of rising prices.
An early sell-off dragged all three major indexes down more than one percent before they pared some losses.
She is also filling key government economic panels with advocates of expansionary fiscal policy, and this week indicated that she is willing to water down long-term commitments to getting the country's fiscal house in order.
Meanwhile, both Takaichi and Trump have made it clear to their respective central banks that they would like to keep monetary policy on the stimulative side too – something many rate-setters might disagree with.
In other words, both leaders appear to be intent on countering the effects of inflation with actions that could very well make inflation worse.
INFLATION DOOM LOOP
Of course, fiscal stimulus can be a powerful and useful tool, especially when directed towards lower-income consumers who will almost always spend the cash they get.
Both the 2007-09 Global Financial Crisis and the pandemic in 2020 showed that fiscal largesse is essential during times of crisis when the economy is in a liquidity trap, demand has collapsed, and deflation is the dragon to be slayed.
But neither the US nor Japan is facing anything approaching economic catastrophe. At an aggregate level, growth in both countries is on the soft side but steady, unemployment is historically low, and inflation is a full percentage point or more above target.
It is also unclear how much this fiscal splurge will boost growth. There is no universally agreed measure of the 'fiscal multiplier', how much economic growth is increased by additional government spending or tax cuts.
But economists do agree that it is higher in recessions than in expansions, when debt-to-GDP ratios are on the small side, and when monetary policy is less "activist", as a San Francisco Fed paper from 2020 put it. In short, in an environment completely different from the ones present in both countries today.
Populist fiscal splurges may be politically appealing to Washington and Tokyo right now, but in the context of bringing down inflation it is an unorthodox approach that could make that struggle harder.
[Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London, and now back in the US again. Focus on economics, central banks, policymakers, and global markets - especially FX and fixed income.]
