Japan PM flags watered-down fiscal goal in push to lift growth
[TOKYO] Japanese Prime Minister Sanae Takaichi said on Monday (Nov 10) that she would work on setting a new fiscal target extending through several years to allow more flexible spending, essentially watering down the country’s commitment to fiscal consolidation.
She also said she would not rule out a cut to Japan’s sales tax as a future option, reinforcing market expectations that her administration will prioritise steps to reflate the economy over fixing worsening public finances.
The remarks signal a major shift from past administrations that stuck to annual fiscal targets and emphasised the need to maintain market trust in Japan’s finances, even as they deployed sizable spending packages.
“We will ensure to maintain market trust in Japan’s sustainable finances. But unless we boost investment, the economy won’t grow,” Takaichi told parliament.
The administration’s focus on expansionary policies could complicate the Bank of Japan’s (BOJ) decision on how soon to resume a rate-hike cycle that has been paused due to uncertainty over the economic fallout from higher US tariffs.
“It is extremely important for monetary policy to be guided in a way that achieves strong economic growth and price stability,” the government said in a draft outline of its economic package seen by Reuters, urging the BOJ to cooperate with government efforts to stimulate demand.
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The central bank kept interest rates steady last month but its board saw a growing case to raise rates in the near-term, a summary of opinions at the meeting showed on Monday.
The central bank next meets for a rate review on Dec 18-19, around the time the administration finalises a draft budget for next fiscal year.
“I don’t think there is a strong chance the BOJ will hike rates at the December meeting, which precedes cabinet approval of next year’s budget,” said Daiwa Securities chief economist Toru Suehiro.
New fiscal goal eyed
Since taking office last month, Takaichi has pledged to compile a package of steps to cushion the blow from rising living costs, and boost investment in growth areas and defence.
Analysts warn such spending plans could threaten Japan’s goal, set in a fiscal blueprint set in June, to deliver a primary budget surplus sometime through fiscal 2025 to 2026.
Takaichi told parliament last week she would drop the idea of using the annual primary budget balance as Japan’s fiscal consolidation goal, in favour of a new one that extends through several years.
While she ruled out ditching the current target immediately, Takaichi said on Monday she would instruct her cabinet in January next year to start work on setting the new fiscal target.
“From now on, I would like to examine new measures to look at the balance (of budget) in a several years’ horizon,” she said.
The primary budget balance, which excludes new bond sales and debt-servicing costs, measures the extent to which policy measures can be funded without resorting to debt.
Japan has repeatedly pushed back the timeframe for achieving a primary budget surplus as past governments continued to deploy massive spending packages to reflate the economy and fend off shocks such as the pandemic.
Takaichi has criticised the primary budget balance as out of sync with global standards and constraining Japan’s ability to use fiscal tools to prop up growth.
Japan is saddled with public debt twice the size of its economy, which is the worst among major economies. Analysts warn the BOJ’s rate-hike plans and dwindling purchase of government bonds would raise the cost of funding its huge debt pile.
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