Japan will compile a new $1.1 trillion stimulus package that includes significant direct spending, to stop the coronavirus pandemic pushing the world’s third-largest economy deeper into recession, a budget draft seen by Reuters showed on Wednesday.

The 117 trillion yen stimulus, which will be funded partly by a second extra budget, will be on top of another 117 trillion package already rolled out last month.

The new package puts the total amount Japan spends to combat the virus fallout at 234 trillion yen ($2.18 trillion)- roughly 40% of Japan’s gross domestic product.

The combined spending would also be among the largest fiscal packages to deal with the coronavirus in the world, approaching the size of United States’ $2.3 trillion aid programme.

The government’s latest package, to be compiled on Wednesday, will include 33 trillion yen in direct spending, the draft showed.

“We must protect business and employment by any means in the face of the tough road ahead. We must also take all necessary measures to prepare for another wave of epidemic,” Prime Minister Shinzo Abe said in a meeting with ruling party lawmakers on Wednesday.

To fund the costs, Japan will issue an additional 31.9 trillion yen in government bonds under the second supplementary budget for the current fiscal year ending in March 2021, according to the draft.

That will push new bond issuance for the current fiscal year to a record 90 trillion yen. When including issuance to roll over debt maturing during the year, Japan’s total issuance for the year would hit a record, exceeding 200 trillion yen and further straining the country’s already tattered finances.

While the Bank of Japan will likely keep borrowing costs low with aggressive bond buying, the surprise increase in issuance of super-long bonds could trigger some volatility in markets, analysts say.

“The BOJ’s yield curve control should prevent a spike in long-term interest rates,” Chotaro Morita, chief bond strategist at SMBC Nikko Security, said. “Volatility in the JGB market will depend on the BOJ’s ability to control its bond purchases.”

Under a policy dubbed yield curve control (YCC), the BOJ guides short-term interest rate at -0.1% and the 10-year bond yield around 0%.

BOJ Governor Haruhiko Kuroda has said YCC is designed to maximise the impact of fiscal spending by keeping borrowing costs low, stressing the need for the government and the central bank to work closely together to combat the virus fallout.

(For an interactive graphic on Japan’s state finances and G7 government debt, click: https://tmsnrt.rs/3dbYohe)

The new package will include steps such as an increased medical spending, aid to firms struggling to pay rent, support for students who lost part-time jobs, and more subsidies to companies hit by slumping sales.

The government will also set aside 10 trillion yen in reserves that can be tapped for emergency spending, Abe added.

In the meeting with ruling party lawmakers, Abe said the government would separately provide up to 140 trillion yen in financial assistance to firms hit by the pandemic.

Japan’s first 117 trillion yen package in April centred on cash payouts to households and steps to cope with the immediate damage from the pandemic.

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