Japan's plan to resume a primary budget surplus, a milestone that has eluded the nation for decades, is facing further postponement as fiscal policies expand under Prime Minister Sanae Takaichi. Despite earlier government forecasts signaling the possibility of a surplus by fiscal 2026, recent projections indicate a move in the opposite direction, highlighting an anticipated deficit driven in part by Takaichi's renewed stimulus efforts and tax policy adjustments.
On Thursday, the government's highest economic advisory body reviewed the fiscal outlook for the upcoming year, unveiling a primary budget deficit projected at 800 billion yen (approximately $5 billion) for fiscal 2026, which begins in April. This contrasts sharply with earlier official estimates that had forecasted a 3.6 trillion yen surplus for the same period. This reversal is primarily attributed to an expansive fiscal initiative amounting to 21.3 trillion yen, introduced late last year under Takaichi's administration.
Compounding the budgetary strain is Prime Minister Takaichi's campaign promise to suspend the 8% tax on food items for a two-year span, a proposal announced alongside the calling of a snap election scheduled in February. The suspension is estimated to reduce government revenue by around 5 trillion yen ($32 billion) annually. The announcement contributed to a surge in investor concern, driving the yield of the benchmark 10-year Japanese government bond to a 27-year peak on the Tuesday following her declaration.
The primary budget balance, a vital fiscal indicator that excludes borrowing through bond sales and costs linked with servicing government debt, serves as an essential measure of Japan’s fiscal health and its ability to fund policy initiatives without increasing indebtedness. Japan's struggle to return to surplus status is a continuation of a long historical trend; except for the bubble economy years between 1986 and 1991, the country has frequently run primary budget deficits, culminating in debt levels exceeding twice its economic output—the highest among developed countries.
The government forecasts a return to surplus in the subsequent fiscal year, 2027, expecting a 3.9 trillion yen surplus on the assumption of steady, modest economic growth. However, this goal seems challenged by the current policy trajectory emphasizing elevated spending levels.
Prime Minister Takaichi articulates a strategic pivot away from fiscal austerity, advocating for a refreshed spending framework extending over multiple years that provides greater flexibility to navigate economic priorities and obstacles.
As Japan navigates this complex fiscal landscape, the implications for sectors sensitive to government spending, taxation policy, and debt sustainability remain significant, affecting areas such as public investment, consumer markets, and bond markets.