FOCUS: Concerns Grow over Japan’s Massive Fiscal Spending under Takaichi

Tokyo, Nov. 22 (Jiji Press)–A large-scale economic package adopted by the government of Japanese Prime Minister Sanae Takaichi on Friday has sparked worries about massive fiscal spending. The package, worth 21.3 trillion yen in terms of government spending, is the first under Takaichi, who took office a month ago. General-account spending under the government’s planned fiscal 2025 supplementary budget to finance measures in the package is expected to total roughly 17.7 trillion yen, up sharply from 13.9 trillion yen under the fiscal 2024 extra budget and the largest since the end of the COVID-19 pandemic. The new Japanese leader, who is eager to leverage fiscal spending to achieve high economic growth under the banner of “responsible and proactive” public finances, does not rule out the possibility of increasing the issuance of Japanese government bonds. With the Japanese government continuing to compile large-scale supplementary budgets even after the end of the pandemic, however, financial markets’ confidence in the country’s public finances and its currency is apparently starting to wane. Soon after the inauguration of the Takaichi administration, concerns about excessive fiscal expansion were low thanks to the influences of Taro Aso, vice president of the ruling Liberal Democratic Party, and LDP Secretary-General Shunichi Suzuki, who attach importance to fiscal discipline. But Takaichi appointed academics and economists who have a reflationary stance of pursuing economic growth with fiscal spending and monetary easing as private-sector members of the blue-ribbon Council on Economic and Fiscal Policy and the Council for Japan’s Growth Strategy. At a CEFP meeting Nov. 12, members including Waseda University professor and former Bank of Japan Deputy Governor Masazumi Wakatabe called on the government to compile a fiscal 2025 supplementary budget featuring larger spending than the fiscal 2024 extra budget. Officials from the prime minister’s office urged the Ministry of Finance to secure funds for all necessary measures to boost the economy. The MOF initially planned to set the size of the envisaged fiscal 2025 supplementary budget at around 14 trillion yen. But calls for an increase in the budget size grew strong in the ruling coalition, according to a source related to the ministry. A group of LDP lawmakers promoting responsible and proactive public finances demanded the compilation of a 25-trillion-yen supplementary budget. The ruling bloc of the LDP and its new partner, Nippon Ishin no Kai (Japan Innovation Party), also accepted opposition demands to ensure an early enactment of the extra budget as the coalition lacks a majority in both chambers of the Diet, Japan’s parliament. As a result, the spending size under the extra budget is now seen expanding to 17.7 trillion yen. Takaichi said Friday that the combined JGB issue amount under the initial and extra budgets for fiscal 2025 will likely fall below the level in fiscal 2024, stressing, “We gave sufficient consideration to fiscal sustainability.” Still, the drop is mainly because the JGB issue amount was curbed under the fiscal 2025 initial budget, which was compiled by the administration of Takaichi’s predecessor, Shigeru Ishiba. The amount of JGBs to be issued under the fiscal 2025 extra budget would likely far exceed the 6.7 trillion yen under the fiscal 2024 supplementary budget. The situation has led to concerns over fiscal deterioration and inflation growing in financial markets, with the yen declining sharply and Japan’s benchmark long-term interest rate, measured by the yield on the most recent issue of 10-year JGBs, temporarily spiking above 1.8 pct to hit the highest level in more than 17 years. An LDP executive who puts weight on fiscal discipline warned that there is a growing possibility that Japan could face a situation similar to Britain’s “Truss shock” in the autumn of 2022, when the country’s financial markets were thrown into turmoil after the administration of then Prime Minister Liz Truss announced a series of expansionary fiscal measures without securing solid revenue sources. END [Copyright The Jiji Press, Ltd.]