Discussions begin on potential revisions to fiscal consolidation target in economic policy blueprint
At a meeting on April 13, the Council on Economic and Fiscal Policy (CEFP) began discussing a revamp of the government's fiscal consolidation target to be included in its upcoming economic policy blueprint.
Private-sector members of the Council proposed replacing the goal of achieving a primary fiscal surplus with steady reductions in the ratio of government debt to GDP as a "core target." They also proposed that efforts to realize a primary fiscal surplus should be "managed over multiple years within the framework of a steady decline in the debt-to-GDP ratio."
Such a policy shift would effectively downplay the importance of a primary fiscal surplus, which successive administrations have aimed for, and place greater emphasis on the debt-to-GDP ratio. Although the proposal was submitted by private-sector members of the CEFP, I believe it effectively reflects the views of the Takaichi administration—after all, it closely aligns with what Prime Minister Takaichi has long been advocating. At the aforementioned meeting, the prime minister stated that "we will accelerate discussions regarding a fundamental review of the budget formulation process, keeping in mind the (proposed) basic principles" ahead of the release of this year's economic policy blueprint.
I suspect the Takaichi administration wants to shift its fiscal consolidation target from a primary fiscal surplus to reductions in the debt-to-GDP ratio because of (1) concerns that being bound by the target of a single-year primary fiscal surplus will hinder flexible fiscal management along with (2) a desire to avoid constraints on "crisis management investment," one of the government's flagship policies.
The decline in the debt-to-GDP ratio over the past several years may also have led the administration to believe that the fiscal environment is not in as critical a state as some have suggested.
Private-sector members of the Council proposed replacing the goal of achieving a primary fiscal surplus with steady reductions in the ratio of government debt to GDP as a "core target." They also proposed that efforts to realize a primary fiscal surplus should be "managed over multiple years within the framework of a steady decline in the debt-to-GDP ratio."
Such a policy shift would effectively downplay the importance of a primary fiscal surplus, which successive administrations have aimed for, and place greater emphasis on the debt-to-GDP ratio. Although the proposal was submitted by private-sector members of the CEFP, I believe it effectively reflects the views of the Takaichi administration—after all, it closely aligns with what Prime Minister Takaichi has long been advocating. At the aforementioned meeting, the prime minister stated that "we will accelerate discussions regarding a fundamental review of the budget formulation process, keeping in mind the (proposed) basic principles" ahead of the release of this year's economic policy blueprint.
I suspect the Takaichi administration wants to shift its fiscal consolidation target from a primary fiscal surplus to reductions in the debt-to-GDP ratio because of (1) concerns that being bound by the target of a single-year primary fiscal surplus will hinder flexible fiscal management along with (2) a desire to avoid constraints on "crisis management investment," one of the government's flagship policies.
The decline in the debt-to-GDP ratio over the past several years may also have led the administration to believe that the fiscal environment is not in as critical a state as some have suggested.
Use of debt-to-GDP ratio to manage fiscal policy could lead to further deterioration in fiscal environment
Under the current circumstances, however, I believe adopting the debt-to-GDP ratio as a fiscal consolidation target would be problematic. It would be more appropriate to first try to achieve a primary fiscal surplus as a "milestone" and then use the debt-to-GDP ratio as a barometer of further progress.
The reason the debt-to-GDP ratio has declined over the past several years is the rapid rise in inflation. If this surge in prices is temporary, the rate of growth in nominal GDP, which represents the denominator in this ratio, will decline. On the other hand, if the surge in prices is a sustained phenomenon, long-term interest rates will continue to rise, and government debt - the numerator in the ratio - will increase as a result of higher interest payments. In either case, the debt-to-GDP ratio will eventually turn higher (see "Are sustained reductions in debt-to-GDP ratio possible under proactive fiscal policy? Reviewing the Domar condition," March 6, 2026).
The debt-to-GDP ratio is also characterized by significant short-term volatility, and using it to guide fiscal management could lead to an underlying deterioration of the fiscal environment.
Prime Minister Takaichi has argued since the start of her administration that using proactive fiscal policy to boost the rate of growth in nominal GDP (the denominator) will lower the debt-to-GDP ratio and therefore improve the fiscal environment, but this approach entails significant risks.
If financial markets trusted this argument and believed that the fiscal environment would actually improve under Ms. Takaichi's "responsible but proactive fiscal policy," long-term interest rates would not have moved steadily higher since she took office. They might even have declined. In my view, the policies of her administration are undermining financial markets' confidence in the sustainability of the nation's finances, and that is adversely affecting both the economy and people's daily lives via higher long-term interest rates and a sustained decline in the Japanese currency.
It is my hope that discussions regarding the fiscal consolidation target in the economic policy blueprint will take a more judicious approach going forward in consideration of the points noted above.
References:
"Private-sector member of CEFP proposes lowering debt-to-GDP ratio" (in Japanese), Asahi Shimbun, April 14, 2026.
"Private-sector member of CEFP proposes verification mechanism for proactive fiscal policy and calls for discipline; Prime Minister says government will'sustain market confidence'" (in Japanese), Nikkei, April 14, 2026.
The reason the debt-to-GDP ratio has declined over the past several years is the rapid rise in inflation. If this surge in prices is temporary, the rate of growth in nominal GDP, which represents the denominator in this ratio, will decline. On the other hand, if the surge in prices is a sustained phenomenon, long-term interest rates will continue to rise, and government debt - the numerator in the ratio - will increase as a result of higher interest payments. In either case, the debt-to-GDP ratio will eventually turn higher (see "Are sustained reductions in debt-to-GDP ratio possible under proactive fiscal policy? Reviewing the Domar condition," March 6, 2026).
The debt-to-GDP ratio is also characterized by significant short-term volatility, and using it to guide fiscal management could lead to an underlying deterioration of the fiscal environment.
Prime Minister Takaichi has argued since the start of her administration that using proactive fiscal policy to boost the rate of growth in nominal GDP (the denominator) will lower the debt-to-GDP ratio and therefore improve the fiscal environment, but this approach entails significant risks.
If financial markets trusted this argument and believed that the fiscal environment would actually improve under Ms. Takaichi's "responsible but proactive fiscal policy," long-term interest rates would not have moved steadily higher since she took office. They might even have declined. In my view, the policies of her administration are undermining financial markets' confidence in the sustainability of the nation's finances, and that is adversely affecting both the economy and people's daily lives via higher long-term interest rates and a sustained decline in the Japanese currency.
It is my hope that discussions regarding the fiscal consolidation target in the economic policy blueprint will take a more judicious approach going forward in consideration of the points noted above.
References:
"Private-sector member of CEFP proposes lowering debt-to-GDP ratio" (in Japanese), Asahi Shimbun, April 14, 2026.
"Private-sector member of CEFP proposes verification mechanism for proactive fiscal policy and calls for discipline; Prime Minister says government will'sustain market confidence'" (in Japanese), Nikkei, April 14, 2026.
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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