By Leika Kihara
TOKYO, Feb 20 (Reuters) – Japanese Prime Minister Sanae Takaichi pledged on Friday to break with “excessive fiscal austerity,” while seeking to reassure nervous markets she would set clear rules to restore the country’s strained finances.
Takaichi also vowed to boost long-term investment in key growth areas through a multi-year budget framework, which would be an overhaul in how Japan drafts budgets.
The premier’s remarks highlight a core financial risk — her flagship spending plan must rejuvenate the world’s fourth-largest economy without triggering debt jitters that could unleash another slide in the yen and government bonds.
In a policy speech to parliament, Takaichi repeated her resolve to pursue “responsible, proactive fiscal policy” aimed at increasing investment in areas like artificial intelligence, chips and shipbuilding to lift Japan’s potential growth.
“My administration will break with the long-standing trend of excessive fiscal austerity and chronic underinvestment for the future,” Takaichi said, adding that Japan should not hesitate to increase spending to support private investment.
Known as an advocate of loose fiscal and monetary policy, Takaichi led her ruling party to a landslide victory in a general election on February 8 with a pledge to boost spending and suspend by two years a consumption tax on food.
Her calls for big spending and tax cuts sparked a selloff in government bonds and the yen late last year, as investors fretted over how Japan – labouring under the developed world’s highest debt burden – would fund her big spending plans.
Takaichi said that to make government initiatives more predictable for firms, her administration will overhaul the way state budgets are drafted such as by promoting multi-year budgets and long-term investment funds.
In Japan, the government sets single-year budgets where expenditure is appropriated for one year instead of spanning several years to ensure spending is scrutinised by parliament.
“For crisis-management and growth investments that generate returns exceeding the investment cost and contribute to GDP growth, we will manage them under a separate, multi-year budget framework,” she said.
“At the same time, we will not adopt reckless fiscal policies that undermine market confidence,” she said, pledging to seek revenues through cuts to some existing subsidies.
The government will also keep the pace of debt increase within the rate of economic growth and steadily lower Japan’s debt-to-GDP ratio to ensure fiscal sustainability, she said, adding it will set specific indicators to measure progress.
FISCAL CONCERN LINGERS
Japan currently uses the primary budget balance, which excludes new bond sales and debt-servicing costs, as a key measurement, and is seeking to achieve a surplus around fiscal 2025 to 2026.
Takaichi had signalled watering down the fiscal goal by replacing the primary budget target with a pledge to lower the debt-to-GDP ratio, or look at both indicators for a longer-term approach in improving Japan’s fiscal health.
Any change or addition to the fiscal measurement will likely be finalised in the government’s fiscal and economic blueprint due out around June, which will be the first to be compiled by the Takaichi administration.
The administration also plans to convene cross-party meetings to discuss the timeframe and funding for a proposed two-year suspension in an 8% levy on food sales.
The risk Takaichi’s plans could spark another bond selloff remains, some analysts say, noting investor nervousness over increased spending and rising debt-financing costs from the Bank of Japan’s interest rate hikes.
Ikuko Samikawa, an academic who is a member of the finance ministry’s panel on debt management, warned of uncertainty on whether Japan can raise the food tax rate back again after two years.
“Once the consumption tax on food is suspended by two years, it might be very hard to re-apply the tax as doing so would be a big tax hike for households. It might take very long to move the tax rate up again,” she told Reuters.
“If so, the impact on Japan’s finances could become very big. That’s our concern.”
(Reporting by Leika KiharaEditing by Shri Navaratnam)
Comments