Japan and Takaichi’s Policy Guidelines Raise the Risk of Fiscal Slippage
Prime Minister Sanae Takaichi’s administration will set economic and fiscal policy guidelines for 2026 in mid-July, targeting JPY370trn (US$2.3trn) in combined public and private investment by fiscal year 2040. We believe the guidelines heighten the risk of serious fiscal slippage in the coming years.
The guidelines have shifted the fiscal goals toward reducing the debt-to-GDP ratio, moving away from a primary balance target. Investment will be financed by bridge bonds without identifying stable future revenue sources. Although the guidelines emphasize maintaining market confidence in fiscal management, the prospect of fiscal sustainability relies on positive assumptions on productivity growth.
The investment plan covers a wide range of sectors deemed critical to strengthen economic security — from supply-chain resilience to critical technologies — while trying to boost the country’s long-term growth potential through support for new industries. However, without measures to strengthen supply capacity, we believe that its impact on productivity will be limited, resulting in a higher debt-to-GDP ratio.
We don’t think the market has fully priced in the risks of fiscal slippage, partly because the guidelines remain vague about specific figures, especially regarding financing. Strong tax revenue has also given investors time to check a debt issuance plan in the coming budgets, which will be discussed later this year.
The guidelines also contain a statement that suggests the government might discourage the Bank of Japan from raising interest rates. Takaichi’s preference for a combination of proactive fiscal policy and easy monetary policy will fuel the market’s perception that the BoJ is falling behind the curve.
