FOCUS: Tough Road Ahead for Japan’s Fiscal Management

Tokyo, Feb. 9 (Jiji Press)–Despite the ruling Liberal Democratic Party’s overwhelming victory in Sunday’s House of Representatives election, Japanese Prime Minister Sanae Takaichi’s administration is expected to face challenges in managing economic and fiscal policies. As the election was held ahead of the March 31 end of the current fiscal year, the government now needs to accelerate preparations for debating its fiscal 2026 budget proposal at a special session of the Diet, the country’s parliament, to be convened as early as next week. But the government is unlikely to get the budget bill passed by the Diet before the new fiscal year begins in April. Against this background, compiling a stopgap budget appears unavoidable. While the LDP pledged in its policy promises to cut the consumption tax rate on food items to zero for two years, the market is paying keen attention to the funding sources. The government also needs to pass legislation to amend the tax system that affects people’s lives and economic activities by the end of March. Takaichi, who is also LDP president, has suggested that the government will secure necessary funds by reviewing subsidies and special taxation measures and using non-tax revenues. Specific discussions will be promoted through a proposed suprapartisan national congress. Major parties campaigned on tax cuts, but there are differing views on the specifics and financial resources. “If we can get cooperation from opposition parties, we would like to make an interim report (on the tax cut) at least before summer,” Takaichi told a news conference Monday. Time is limited, however. Market players are currently paying attention to the Takaichi administration’s next move. Previously, Takaichi’s announcement of a plan to cut the consumption tax prompted concerns about worsening public finances, leading to a sell-off of government bonds and a spike in interest rates. After the prime minister noted during the election campaign that the government’s foreign exchange special account was gaining large benefits from the yen’s current decline, the Japanese currency met with selling as her remark was interpreted as tolerating the currency’s weakening. If market concerns about tax cuts escalate, that could result in further interest rate hikes and a weaker yen. A depreciating yen could increase import prices and consumer costs. “Even though the ruling camp scored a landslide win, market participants continue to pay attention” to economic and fiscal policies, a senior government official said. “We need to be aware of the ‘responsibility’ part of (Takaichi’s) responsible and proactive fiscal policy.” END [Copyright The Jiji Press, Ltd.]