The ruling Liberal Democratic Party’s (LDP) landslide election victory on Sunday doesn’t change our expectation of a primary fiscal deficit of 2%-3% of GDP in FY2026-FY2028 – we still see the deficit only starting to decline from FY2029. We also keep our view that the 10-year Japanese government bond (JGB) yield will be at 2.3% at end-2026 and 2.5% at end-2027 and beyond.
In our upcoming February forecast update, we’ll stick to our expectation of a primary fiscal deficit of 2%-3% of GDP in FY2026 and FY2027, but now think it will remain at that level in FY2028, only starting to gradually decline in FY2029 and beyond.
Despite the new government’s 2026 budget being slightly more timid than anticipated, we don’t plan major changes to our outlook. However, this doesn’t mean the government will show fiscal restraint in the coming years. A smaller deficit will slow but not halt the rise in bond yields in 2026, as markets price in higher current spending-driven borrowing and relaxed fiscal rules.
Japanese government bond yields have surged over the past few weeks. Here, we answer the most frequently asked questions about why this is happening and what it means for Japanese policy.
We think the Czech 10-year bond yield is on track to breach 5% in the coming months, as the markets continue to price in the fiscally profligate programme of the new government.
Gilt yields are expected to ease over the coming years, but higher term premia, fiscal pressures, and shifting investor demand could slow the pace of decline. With markets underestimating these forces, are investors prepared for a longer wait for lower yields?
We’ve changed our fiscal outlook for Japan in our December forecast round. We now expect the new government to set a primary deficit close to that of 2024, at 2%-3% of GDP for 2025-2027, instead of restoring a balanced budget by taking advantage of strong tax revenue. We assume higher bond yields will force the government to take measures to reduce the deficit from 2028.
We anticipate another year of broadly steady and unexceptional global GDP growth, but with some more interesting stories running below the surface.
The UK Budget featured a backloaded tightening of fiscal policy via a series of tax rises. Given most of the tightening is pencilled in for 2029, which is an election year, we’re sceptical it will be fully implemented when the time comes.
The end of the government shutdown did not alter the broader economic trajectory, but it did create a sharp swing in the sequential pace of GDP growth within the November baseline outlook. As Washington refocuses on affordability and agencies restart delayed data releases, the coming weeks will offer clearer insight into how policy debates, price pressures, and election-year dynamics may shape the near-term environment.
Half-built Britain – unlocking the nation’s infrastructure growth plans has been written for the Construction Plant-hire Association. It investigates how the government’s plans translate into action on the ground through the lens of three major policy releases over the summer of 2025—the Comprehensive Spending Review, Industrial Strategy, and National Infrastructure Strategy.
Southern European economies face the threat of a steep fiscal cliff in 2027. The EU Commission plans to end payments from the EU recovery fund by the end of 2026.
The Budget on November 26 will be a key test of market confidence in the UK government’s fiscal approach. If the government missteps and markets take fright, we think that sterling depreciation would accompany higher gilt yields.
A federal government shutdown is unlikely to shift forecasts for GDP, unemployment, or inflation but adds downside risks to near-term growth. Extended disruption could also influence the Fed’s timing on rate cuts. How long would it take for the shutdown to leave a lasting mark on the economy?
The next Czech government will inherit a relatively fast-growing consumer-driven economy, but also a host of difficult medium-term challenges.
Diverging fortunes across age and income groups reveal both resilience and fragility in the US consumer outlook.
Large primary deficits make for a concerning fiscal outlook
The ruling Liberal Democratic party (LDP) and its partner Komeito lost their majority in Japan’s upper house elections on July 20. Although Prime Minister Shigeru Ishiba will likely stay to avoid political gridlock, especially to complete tariff negotiations with the US, the political situation has become fluid and could lead to a leadership change or the reshuffling of the coalition.
The July baseline forecast will fully adopt the Republican tax-and-spending bill, which is poised to become law by the July 4 deadline.
NATO’s commitment to spend 5% of GDP annually on defence by 2035 is broadly in line with the change to our defence-spending assumptions that we made in March, when we lifted core defence spending from 2% of GDP to 3% by 2030 and to 3.5% by 2035.
