Takahide Kiuchi, Executive Economist, Financial Technology Solution Division
Touting a “responsible and proactive fiscal policy”, the Takaichi Administration has announced large-scale economic measures in a way that is designed to show the appeal of its policy stance to the outside world. In its supplementary budget bill, which is meant to serve as the budgetary underpinning of its economic measures, the total amount of general account outlays came out to 18.3 trillion yen, with the key items in the breakdown of this total including 8.9 trillion yen allocated for measures for livelihood security and easing the strain of high prices on households, 6.4 trillion yen marked to build a strong economy by expanding investments for crisis management and growth, and 1.7 trillion yen set aside for national defense and diplomacy. The bill also included 710 billion yen in reserve funds to cover disaster responses and help local governments address the surge in bear attacks.
The scale of the economic measures greatly surpasses last year’s
In terms of the scale of the economic stimulus package formulated under the Ishiba Administration last year, the supplementary budget amounted to 13.9 trillion yen in spending from the general account. This time the figure is 18.3 trillion yen, nearly 30% more than that. If we add on the 2.7 trillion in tax breaks included in the new stimulus package, such as the scrapping of the gasoline tax surcharge, then the figure ends up being approximately 50% higher.
To fund this supplementary budget, the government is allocating some 2.9 trillion in higher-than-expected tax revenue collected in FY2025, as well as 2.7 trillion yen from a budget surplus from FY2024, for example. The remainder is to be financed through the issuance of 11.7 trillion-yen worth of additional government bonds, which is to say, it will be financed by debt. This will account for around 64% of total spending under the supplementary budget.
The government expects to collect 80.7 trillion yen in tax revenue in FY2025, a figure that would set an all-time record high. Some are of the view that the higher-than-expected amount of the tax proceeds ought to be distributed back to the people through economic stimulus measures.
However, the excess tax revenue that has been allocated to funding the supplementary budget is the amount exceeding the government’s initial receipt forecast due to factors such as inflationary effects, and it does not necessarily mean that there was a surplus in the nation’s finances. Tax revenues and other receipts are still well below outlays, and it remains true that government funds are lacking. To formulate a large-scale supplementary budget under such circumstances would lead Japan’s already severe fiscal environment to deteriorate even further.
To fund this supplementary budget, the government is allocating some 2.9 trillion in higher-than-expected tax revenue collected in FY2025, as well as 2.7 trillion yen from a budget surplus from FY2024, for example. The remainder is to be financed through the issuance of 11.7 trillion-yen worth of additional government bonds, which is to say, it will be financed by debt. This will account for around 64% of total spending under the supplementary budget.
The government expects to collect 80.7 trillion yen in tax revenue in FY2025, a figure that would set an all-time record high. Some are of the view that the higher-than-expected amount of the tax proceeds ought to be distributed back to the people through economic stimulus measures.
However, the excess tax revenue that has been allocated to funding the supplementary budget is the amount exceeding the government’s initial receipt forecast due to factors such as inflationary effects, and it does not necessarily mean that there was a surplus in the nation’s finances. Tax revenues and other receipts are still well below outlays, and it remains true that government funds are lacking. To formulate a large-scale supplementary budget under such circumstances would lead Japan’s already severe fiscal environment to deteriorate even further.
A depreciating yen could offset the effects of inflation countermeasures
Ever since the Takaichi Administration took office advocating a “responsible and proactive fiscal policy”, the depreciation of the yen and the decline in bond prices (i.e., a rise in yields) have almost consistently continued to unfold in the financial market. An aggressive fiscal policy prompting fears of a worsening supply-demand balance for government bonds and the erosion of faith in the nation’s finances serves to drive long-term JGB yields upward. That trend has only intensified since the government announced its economic stimulus package and supplementary budget. Ten-year JGB yields recently hit around 2%, the highest level in nearly 18 and a half years.
An aggressive fiscal policy also undermines fiscal credibility and confidence in the nation’s currency, and consequently, the yen has only depreciated further.
A weak yen pushes import prices higher, intensifying the inflationary pressure on domestic prices. The largest pillar of this economic stimulus package is its inflation measures, with the bulk of the budget being devoted thereto. However, if the drafting of such a large-scale stimulus package shakes the public’s confidence in the nation’s finances and leads the yen to weaken further, the effects of those inflation measures will be diminished proportionately. If we take a slightly longer view of things, there is also the chance that this approach will mean a heavier burden on households overall. From this perspective, it would seem that pursuing scale in an economic stimulus package is not the most sensible approach.
Now, I believe supporting those with low incomes, whose livelihoods have been squeezed especially hard by high prices, is the right thing to do. Yet rather than assistance measures that cover a wide range of households, creating measures that are more narrowly focused on low income earners might have been better. This is because in that scenario, the overall scale of the budget would be capped at just several trillion yen, meaning the nation’s finances would not be put at greater risk, while also enabling those low-income families to receive more generous assistance.
An aggressive fiscal policy also undermines fiscal credibility and confidence in the nation’s currency, and consequently, the yen has only depreciated further.
A weak yen pushes import prices higher, intensifying the inflationary pressure on domestic prices. The largest pillar of this economic stimulus package is its inflation measures, with the bulk of the budget being devoted thereto. However, if the drafting of such a large-scale stimulus package shakes the public’s confidence in the nation’s finances and leads the yen to weaken further, the effects of those inflation measures will be diminished proportionately. If we take a slightly longer view of things, there is also the chance that this approach will mean a heavier burden on households overall. From this perspective, it would seem that pursuing scale in an economic stimulus package is not the most sensible approach.
Now, I believe supporting those with low incomes, whose livelihoods have been squeezed especially hard by high prices, is the right thing to do. Yet rather than assistance measures that cover a wide range of households, creating measures that are more narrowly focused on low income earners might have been better. This is because in that scenario, the overall scale of the budget would be capped at just several trillion yen, meaning the nation’s finances would not be put at greater risk, while also enabling those low-income families to receive more generous assistance.
The financial markets are sounding the alarm bells
In response to the government’s aggressive fiscal policy measures, it would seem that the bond market and the exchange market are strongly sounding the alarm. For the financial markets to have moved so significantly as a reflection of the fiscal risks is arguably something we have not seen in recent times. Going forward, if the government maintains its aggressive fiscal policy stance in the budget formulation for next fiscal year, the concerns about financial deterioration already smoldering in the financial markets may burgeon into an even greater sense of crisis, and lead stock prices — which are relatively stable at present — to begin to tumble.
If that happens, it could potentially lead to a “triple depreciation” with the simultaneous fall in value of the yen, stocks, and bonds, triggering a flight of funds from Japan to produce a so-called “sell Japan” phenomenon. This could ultimately plunge Japan’s economy and financial markets into chaos, and cause serious pain for the people.
Before it goes that far, the government should listen very earnestly to these market warnings, and show the markets that it intends to place the utmost importance on fiscal soundness.
If that happens, it could potentially lead to a “triple depreciation” with the simultaneous fall in value of the yen, stocks, and bonds, triggering a flight of funds from Japan to produce a so-called “sell Japan” phenomenon. This could ultimately plunge Japan’s economy and financial markets into chaos, and cause serious pain for the people.
Before it goes that far, the government should listen very earnestly to these market warnings, and show the markets that it intends to place the utmost importance on fiscal soundness.
Sticking to the objective of achieving a primary balance surplus
With this latest large-scale economic stimulus package, the government’s objective of achieving a primary balance surplus — which it has long maintained in pursuit of realizing fiscal soundness — may become further out of reach.
Given the circumstances, the government is apparently considering taking a more flexible approach to reaching this objective, for instance by dropping the notion of attaining a primary balance surplus in a single fiscal year in favor of making it a multi-year target. The aim here may well be to eliminate any factors that would constrain a flexible fiscal policy, but the act of blurring this objective of achieving a primary balance surplus could be interpreted by the markets as signifying that the government is seriously dialing back its efforts toward fiscal consolidation.
The government also seems to be thinking about addressing the nation’s gross-debt-to-nominal GDP ratio as a new objective. Underlying this is the fact that the trend in the debt-to-nominal GDP ratio over the past few years has gone from steady to a slight downward track. If it makes tackling this trend a new objective, then perhaps aggressive fiscal policy measures would be justified.
However, the fact that the gross-debt-to-nominal GDP ratio has plateaued is very likely just a transient phenomenon. The apparent backdrop to this is that while nominal GDP (the denominator in this ratio) has risen significantly amid the historically high inflation rate of 3% year-on-year, the bond market believes that the uptick in prices is a temporary occurrence spurred on by the yen’s depreciation. Thus, the rise in long-term interest rates has been subdued compared to the rise in prices, and this in turn has suppressed the growth of government debt (the numerator), which would balloon from interest expenses. In addition, the continuation of the Bank of Japan’s extraordinary monetary easing policies has likely also helped curb the rise in long-term interest rates.
Nevertheless, if the uptick in the inflation rate is a fleeting phenomenon as the financial markets suppose, then the growth rate of nominal GDP (the denominator) will also come down as the inflation rate falls anyway, and the nation’s gross-debt-to-GDP ratio likely will begin to climb once again.
On the other hand, if the bond market should begin to believe that the rise in the inflation rate is not a transient one, then long-term interest rates would start rising, and that would cause the government’s interest expenses to blow up, leading government debt (the numerator) to increase further. Add the effects of the interest rate hikes by the Bank of Japan to this, and we could very well see the gross-debt-to-nominal GDP ratio start to go up again.
If the government wants to decisively demonstrate to the financial market the appeal of its goal of achieving fiscal soundness over the medium and long terms, the best thing might be to keep a primary balance surplus as its objective and aim to achieve that first.
My hope is that the government will listen seriously to the alarm bells being rung right now in the financial markets, and then proceed carefully with managing its fiscal policies, working within the context of its upcoming financial schedule — which includes passing the supplementary budget, drafting the end-of-the-year Taxation Revision Outline, formulating next fiscal year’s budget proposal, and discussing its fiscal soundness objective under next spring’s “Basic Policies (for Economic and Fiscal Management and Reform)” — to prevent fears in the financial markets about fiscal risk from growing any further.
Given the circumstances, the government is apparently considering taking a more flexible approach to reaching this objective, for instance by dropping the notion of attaining a primary balance surplus in a single fiscal year in favor of making it a multi-year target. The aim here may well be to eliminate any factors that would constrain a flexible fiscal policy, but the act of blurring this objective of achieving a primary balance surplus could be interpreted by the markets as signifying that the government is seriously dialing back its efforts toward fiscal consolidation.
The government also seems to be thinking about addressing the nation’s gross-debt-to-nominal GDP ratio as a new objective. Underlying this is the fact that the trend in the debt-to-nominal GDP ratio over the past few years has gone from steady to a slight downward track. If it makes tackling this trend a new objective, then perhaps aggressive fiscal policy measures would be justified.
However, the fact that the gross-debt-to-nominal GDP ratio has plateaued is very likely just a transient phenomenon. The apparent backdrop to this is that while nominal GDP (the denominator in this ratio) has risen significantly amid the historically high inflation rate of 3% year-on-year, the bond market believes that the uptick in prices is a temporary occurrence spurred on by the yen’s depreciation. Thus, the rise in long-term interest rates has been subdued compared to the rise in prices, and this in turn has suppressed the growth of government debt (the numerator), which would balloon from interest expenses. In addition, the continuation of the Bank of Japan’s extraordinary monetary easing policies has likely also helped curb the rise in long-term interest rates.
Nevertheless, if the uptick in the inflation rate is a fleeting phenomenon as the financial markets suppose, then the growth rate of nominal GDP (the denominator) will also come down as the inflation rate falls anyway, and the nation’s gross-debt-to-GDP ratio likely will begin to climb once again.
On the other hand, if the bond market should begin to believe that the rise in the inflation rate is not a transient one, then long-term interest rates would start rising, and that would cause the government’s interest expenses to blow up, leading government debt (the numerator) to increase further. Add the effects of the interest rate hikes by the Bank of Japan to this, and we could very well see the gross-debt-to-nominal GDP ratio start to go up again.
If the government wants to decisively demonstrate to the financial market the appeal of its goal of achieving fiscal soundness over the medium and long terms, the best thing might be to keep a primary balance surplus as its objective and aim to achieve that first.
My hope is that the government will listen seriously to the alarm bells being rung right now in the financial markets, and then proceed carefully with managing its fiscal policies, working within the context of its upcoming financial schedule — which includes passing the supplementary budget, drafting the end-of-the-year Taxation Revision Outline, formulating next fiscal year’s budget proposal, and discussing its fiscal soundness objective under next spring’s “Basic Policies (for Economic and Fiscal Management and Reform)” — to prevent fears in the financial markets about fiscal risk from growing any further.
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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