Japan Govt Worsens Debt-to-GDP Ratio Estimate for FY 2026

Tokyo, July 30 (Jiji Press)–The Japanese government said Thursday that the ratio of total central and local government debts to the country’s gross domestic product is estimated to be 187.6 pct in fiscal 2026, 1 percentage point higher than in the previous January projection. The higher debt-to-GDP ratio, presented at a meeting of the Council on Economic and Fiscal Policy chaired by Prime Minister Sanae Takaichi, reflects additional issuances of deficit-covering Japanese government bonds to fund the supplementary budget of more than 3 trillion yen passed last month. The government also revised down its GDP growth forecast in light of the conflict in the Middle East. The Takaichi administration has newly designated the debt-to-GDP ratio as the centerpiece of its fiscal targets. It estimated Japan’s GDP growth and fiscal balance through fiscal 2040 based on the latest economic conditions, taking into account a plan for more than 370 trillion yen in public-private investments by fiscal 2040 as part of its aim to build a stronger economy, as well as additional annual government spending of about 10 trillion yen from fiscal 2027. Japan’s debt-to-GDP ratio is expected to improve even if the government increases JGB issuance to some extent, as long as GDP growth accelerates. Under a scenario in which investment produces the maximum effect, the ratio is projected to worsen in fiscal 2026 but continue improving through fiscal 2040. In a scenario that assumes GDP growth while factoring in uncertainty surrounding technological progress and market conditions, the ratio is seen improving through fiscal 2036 before deteriorating. Under a scenario in which expected private investment fails to materialize, the ratio turns worse from fiscal 2032. Meanwhile, the government revised down its forecast of Japan’s real GDP growth rate for fiscal 2026 to 0.9 pct from 1.3 pct in January, and its nominal GDP growth rate projection to 3.0 pct from 3.4 pct. For fiscal 2027, real GDP growth is forecast at 1.1 pct and nominal growth at 3.9 pct. The government estimated that GDP growth in fiscal 2040 would fall between 0.3 pct and 1.8 pct in real terms and 1.9 pct and 3.4 pct in nominal terms, depending on whether its growth strategy succeeds. The primary balance, which indicates to what extent the government can cover its policy costs with tax and other revenues without relying on debt issuance, was forecast at a deficit of around 1,200 billion yen in fiscal 2026, worsening from a deficit of roughly 800 billion yen in the January estimate. The balance, which had been regarded as a key fiscal target by past administrations, is expected to improve to a surplus of around 1,400 billion yen in fiscal 2027 thanks to increased tax revenue, but it may fall into the red if the government uses the expected uptick in revenue to finance a reduction in the consumption tax rate for foods. Japan’s fiscal health may deteriorate rapidly because of rising interest payments on government debt if strong economic growth is neither achieved nor sustained and fiscal spending increases for measures to address inflation. END [Copyright The Jiji Press, Ltd.]