Japan’s Takaichi vows to break with ‘fiscal austerity’ to spark economic revival

TOKYO – Japanese Prime Minister Sanae Takaichi on Feb 20 pledged to break with “excessive fiscal austerity” and boost long-term investment through a multi-year budget framework, underlining her administration’s commitment to revitalising the economy.

At the same time, in a nod to growing market concerns about Japan’s worsening finances, she vowed to set specific indicators to measure progress in getting the nation’s fiscal house in order.

Ms Takaichi’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, Ms 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 longstanding trend of excessive fiscal austerity and chronic underinvestment for the future,” she said, adding that Japan should not hesitate to increase spending to support private investment.

Known as an advocate of loose fiscal and monetary policy, Ms Takaichi led her ruling party to

a landslide victory

in a general election on Feb 8 with a pledge to suspend a consumption tax on food for two years and boost spending.

Her calls for big spending and tax cuts sparked a sell-off in government bonds and the yen late in 2025, as investors fretted over how Japan – labouring under the developed world’s highest debt burden – would fund her big spending plans.

Ms 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 (gross domestic product) 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 added, 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 that 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.

Ms 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 of an 8 per cent levy on food sales.

The risk that Ms Takaichi’s plans could spark another bond sell-off remains, some analysts say, noting investor nervousness over increased spending and rising debt-financing costs from the Bank of Japan’s interest rate hikes.

Dr 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 reapply 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.” REUTERS