Summer electricity and gas subsidies to total ¥500bn, reducing household bills by ¥5,000 over three months
At a press conference held on May 25, Japanese Prime Minister Sanae Takaichi said the government would compile a supplementary budget of just over ¥3tn to bolster initiatives aimed at minimizing the disruption to economic activity and people’s lives and livelihoods from the Middle East situation. The bill will be submitted to the Diet as early as next week (the week of June 1). Assuming an expenditure elasticity of income of 0.25, I estimate that a ¥3tn supplementary budget would lift real GDP by 0.11% over one year.
The budget will be earmarked for three specific measures: subsidies for electricity and gas charges from July to September; local grants for priority support, including support for users of LP gas and extra-high-voltage electricity; and the continuation of gasoline subsidies.
Electricity subsidies will be set at ¥3.5 per kilowatt-hour of usage in July and September and ¥4.5 in August. The winter electricity and gas subsidies in Jan–Mar 2026 amounted to ¥4.5 per kilowatt-hour. At the time, the government released estimates indicating that the subsidies would reduce the electricity and gas bills paid by households with two or more persons by an average of ¥7,300 over the three-month period. Prime Minister Takaichi explained that the current subsidies will reduce the three-month cost for a standard household by around ¥5,000.
The budget for these subsidies in the Jan–Mar quarter totaled ¥529.6bn. Ms. Takaichi has said that around ¥500bn of the ¥1tn reserve funds in the initial FY2026 budget will be allocated for the current round of subsidies. Since the estimated savings is around ¥5,000 per household, or 68.5% of the ¥7,300 amount in Jan–Mar, this would require a total budget of ¥362.7bn. However, the government is seeking an actual budget of around ¥500bn, suggesting it will probably try to allocate more for these subsidies.
This ¥500bn or so will come from the ¥1tn reserve fund in the initial FY2026 budget, but because the supplementary budget will top up that fund to its initial level of ¥1tn, the electricity and gas subsidies in Jul–Sep 2026 will effectively be funded by the supplementary budget.
The budget will be earmarked for three specific measures: subsidies for electricity and gas charges from July to September; local grants for priority support, including support for users of LP gas and extra-high-voltage electricity; and the continuation of gasoline subsidies.
Electricity subsidies will be set at ¥3.5 per kilowatt-hour of usage in July and September and ¥4.5 in August. The winter electricity and gas subsidies in Jan–Mar 2026 amounted to ¥4.5 per kilowatt-hour. At the time, the government released estimates indicating that the subsidies would reduce the electricity and gas bills paid by households with two or more persons by an average of ¥7,300 over the three-month period. Prime Minister Takaichi explained that the current subsidies will reduce the three-month cost for a standard household by around ¥5,000.
The budget for these subsidies in the Jan–Mar quarter totaled ¥529.6bn. Ms. Takaichi has said that around ¥500bn of the ¥1tn reserve funds in the initial FY2026 budget will be allocated for the current round of subsidies. Since the estimated savings is around ¥5,000 per household, or 68.5% of the ¥7,300 amount in Jan–Mar, this would require a total budget of ¥362.7bn. However, the government is seeking an actual budget of around ¥500bn, suggesting it will probably try to allocate more for these subsidies.
This ¥500bn or so will come from the ¥1tn reserve fund in the initial FY2026 budget, but because the supplementary budget will top up that fund to its initial level of ¥1tn, the electricity and gas subsidies in Jul–Sep 2026 will effectively be funded by the supplementary budget.
Three months of gasoline subsidies would require additional ¥1.5tn under current system
The supplementary budget will also help fund “local grants for priority support” to bolster government assistance for local areas in line with their specific needs, including support for users of extra-high-voltage electricity and LP gas, which is commonly used in regional areas. The amount of assistance to be provided has yet to be specified. Providing subsidies for the extra-high-voltage electricity used by large factories and major facilities likely means that government support will also extend to large companies.
The supplementary budget is also expected to provide additional monies for gasoline subsidies, funding for which is expected to run out as soon as late June. There have been growing calls within the LDP to scale back these subsidies because of the pressure they are putting on the budget, and Prime Minister Takaichi is ultimately expected to review them. At her press conference, however, Ms. Takaichi limited her remarks to saying that "the government will closely monitor future price developments and their impact on the economy and will proceed with necessary discussions."
Under the current gasoline subsidy system, which caps the average nationwide price of regular gasoline at around ¥170 per liter, subsidies in the month through May 25 are estimated to have cost ¥494.5bn, or just under ¥500bn. Three more months of subsidies would cost an additional ¥1.5tn or so, and six more months around ¥3.0tn. A large portion of the supplementary budget is therefore expected to be allocated to the continuation of gasoline subsidies.
The supplementary budget is also expected to provide additional monies for gasoline subsidies, funding for which is expected to run out as soon as late June. There have been growing calls within the LDP to scale back these subsidies because of the pressure they are putting on the budget, and Prime Minister Takaichi is ultimately expected to review them. At her press conference, however, Ms. Takaichi limited her remarks to saying that "the government will closely monitor future price developments and their impact on the economy and will proceed with necessary discussions."
Under the current gasoline subsidy system, which caps the average nationwide price of regular gasoline at around ¥170 per liter, subsidies in the month through May 25 are estimated to have cost ¥494.5bn, or just under ¥500bn. Three more months of subsidies would cost an additional ¥1.5tn or so, and six more months around ¥3.0tn. A large portion of the supplementary budget is therefore expected to be allocated to the continuation of gasoline subsidies.
Growth in fiscal deficit due to supplementary budget will still be financed through issuance of deficit-financing bonds
Measures to address the surge in crude oil prices and other effects of the escalation of tensions in the Middle East are necessary, but the supplementary budget amounts to more than ¥3tn, and there are concerns about its impact on the nation's finances and financial markets.
Prime Minister Takaichi noted that ¥3tn in special deficit-financing bonds for FY2025 that were scheduled to be issued by June will not actually need to be issued given the outlook for tax revenues and other factors. However, even if new issuance of deficit-financing bonds can be kept in check, any growth in the fiscal deficit resulting from the supplementary budget will still have to be financed with the issuance of deficit-financing bonds.
While the escalation of tensions in the Middle East may require the formulation of a supplementary budget, the government needs to maintain its fiscal credibility. From this perspective, I think it should consider shelving the proposal currently being discussed to reduce the consumption tax rate on food products to 0% for two years, given that discussions on funding sources have made little progress. Additionally, consideration should perhaps be given to scaling back the plans to increase government investment in the initial FY2027 budget, which will be the first to reflect the priorities of the Takaichi administration to a significant extent.
Prime Minister Takaichi noted that ¥3tn in special deficit-financing bonds for FY2025 that were scheduled to be issued by June will not actually need to be issued given the outlook for tax revenues and other factors. However, even if new issuance of deficit-financing bonds can be kept in check, any growth in the fiscal deficit resulting from the supplementary budget will still have to be financed with the issuance of deficit-financing bonds.
While the escalation of tensions in the Middle East may require the formulation of a supplementary budget, the government needs to maintain its fiscal credibility. From this perspective, I think it should consider shelving the proposal currently being discussed to reduce the consumption tax rate on food products to 0% for two years, given that discussions on funding sources have made little progress. Additionally, consideration should perhaps be given to scaling back the plans to increase government investment in the initial FY2027 budget, which will be the first to reflect the priorities of the Takaichi administration to a significant extent.
Growing shortages of naphtha-derived petroleum products
At her press conference, Prime Minister Takaichi also discussed the government's efforts to secure supplies of crude oil and naphtha. She said that the percentage of crude oil procured by alternative routes bypassing the Strait of Hormuz would rise to around 80% in June and that the government would be able to ensure stable supplies of oil into next fiscal year and through next spring. She also said that the percentage of naphtha secured by alternative routes from producers outside the Middle East had climbed to more than 80% and that supplies of naphtha-derived petroleum products would continue into next year.
Despite the government claims that supplies of crude oil and naphtha have been assured, shortages of naphtha-derived petroleum products are being reported on a daily basis. The reason may be less the "bottlenecks" in distribution cited by the government and more that companies remain deeply concerned about shortages of crude oil and naphtha and are reducing production in response. Companies have doubts about whether reliable alternative supplies of crude oil and naphtha will continue going forward.
The government has maintained its stance that there is no need to call on households or companies to conserve petroleum products since supplies of crude oil and naphtha have been secured through alternative routes. At her recent press conference, Prime Minister Takaichi reiterated that "we are not at the stage of asking for more extensive conservation efforts that would depress economic activity."
However, given the uncertainty surrounding continued supplies of crude oil and naphtha, I think the government should move quickly to implement demand-side measures, such as calling for modest conservation efforts, to ease corporate concerns over crude oil and naphtha shortages and encourage the supply of petroleum products by encouraging producers to ease up on production cuts to some extent.
Despite the government claims that supplies of crude oil and naphtha have been assured, shortages of naphtha-derived petroleum products are being reported on a daily basis. The reason may be less the "bottlenecks" in distribution cited by the government and more that companies remain deeply concerned about shortages of crude oil and naphtha and are reducing production in response. Companies have doubts about whether reliable alternative supplies of crude oil and naphtha will continue going forward.
The government has maintained its stance that there is no need to call on households or companies to conserve petroleum products since supplies of crude oil and naphtha have been secured through alternative routes. At her recent press conference, Prime Minister Takaichi reiterated that "we are not at the stage of asking for more extensive conservation efforts that would depress economic activity."
However, given the uncertainty surrounding continued supplies of crude oil and naphtha, I think the government should move quickly to implement demand-side measures, such as calling for modest conservation efforts, to ease corporate concerns over crude oil and naphtha shortages and encourage the supply of petroleum products by encouraging producers to ease up on production cuts to some extent.
Profile
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Takahide KiuchiPortraits of Takahide Kiuchi
Executive Economist
Takahide Kiuchi started his career as an economist in 1987, as he joined Nomura Research Institute. His first assignment was research and forecast of Japanese economy. In 1990, he joined Nomura Research Institute Deutschland as an economist of German and European economy. In 1996, he started covering US economy in New York Office. He transferred to Nomura Securities in 2004, and four years later, he was assigned to Head of Economic Research Department and Chief Economist in 2007. He was in charge of Japanese Economy in Global Research Team. In 2012, He was nominated by Cabinet and approved by Diet as Member of the Policy Board, the committee of the highest decision making in Bank of Japan. He implemented decisions on the Bank’s important policies and operations including monetary policy for five years.
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