ORLANDO, Florida, Nov 13 (Reuters) - The United States

and Japan are both employing a novel inflation-fighting tool:

fiscal stimulus.

U.S. 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 U.S. households, a 'tariff dividend' funded via money

raised by the cranked-up duties on U.S. 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% than the Fed's 2% 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.

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 U.S. 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.

(The opinions expressed here are those of the author, a

columnist for Reuters)

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