FOCUS: Takaichi’s Investment Push Raises Fiscal Discipline Concerns

Tokyo, Aug. 20 (Jiji Press)–Japanese Prime Minister Sanae Takaichi’s government plans to mobilize more than 370 trillion yen in combined public- and private-sector investment by fiscal 2040, aiming to lift Japan’s nominal economic growth above 3 pct and real growth above 1 pct. The ambitious plan, incorporated into the Basic Policy on Economic and Fiscal Management and Reform 2026 approved by the cabinet on July 21, underscores the administration’s focus on what it calls “responsible and proactive public finances.” The policy is the first such document compiled since Takaichi took office in October 2025. But the government has yet to clarify either the funding sources or the scale of the newly established investment framework, fueling concerns that the initiative could undermine fiscal discipline. Market Shock At a joint meeting of the Council on Economic and Fiscal Policy and the Council for Japan’s Growth Strategy on July 21, Takaichi signaled a major shift in the government’s approach to economic and fiscal management. “We will break away from the excessive austerity mindset and chronic underinvestment in the future, and thoroughly bolster domestic investment,” she declared. The government’s basic policy, known in Japanese as the “Honebuto no Hoshin,” includes a medium- to long-term economic and fiscal plan covering fiscal 2027 to fiscal 2040. The plan aims to boost nominal gross domestic product to around 1,100 trillion yen in fiscal 2040 through public- and private-sector investment in 17 strategic fields, including artificial intelligence and semiconductors. To secure government spending that can serve as a catalyst for private investment, the administration plans to create an “investment framework for a strong and prosperous Japan,” under which budget requests from ministries and agencies would not be subject to upper limits. For fields deemed particularly important from the standpoint of economic security, the government plans to raise necessary funds through the issuance of bridge government bonds, backed by what it describes as solid prospects for securing redemption resources. These funds would be managed separately under a special account. Even so, the absence of concrete measures to finance the large-scale growth investment plan has sent shock waves through financial markets, triggering a sharp rise in long-term interest rates. The market turmoil has come to be known as the “Honebuto shock.” When the administration presented a draft of the basic policy in late June, Japanese government bonds came under heavy selling pressure amid concerns over increased debt issuance. On July 9, the yield on the latest 10-year JGB issue, regarded as Japan’s benchmark for long-term interest rates, briefly reached 2.9 pct, its highest level in about 30 years. The key yield rose further earlier in August, approaching 2.95 pct. In addition to growth-related investment, the Takaichi administration is preparing a series of policies that would require large-scale fiscal measures, including a temporary consumption tax cut on food items and an increase in defense spending. The administration says these initiatives can be funded through higher tax revenue, spending reforms such as reviews of special tax measures and subsidies, and nontax revenue. Still, concerns persist among market participants that Japan could face a repeat of Britain’s “Truss shock,” when financial markets were thrown into turmoil in autumn 2022 after the administration of then Prime Minister Liz Truss announced sweeping tax cuts without adequate funding sources. Balancing Budget The basic policy’s references to the Bank of Japan’s monetary policy intensified the Honebuto shock. The draft stated explicitly that, to realize a strong economy, it is “very important” for appropriate monetary policy management to be conducted–wording that markets interpreted as an attempt to keep interest rate hikes in check. Seeking to curb the rise in long-term interest rates, the Takaichi government moved quickly to add a footnote citing Article 3 of the BOJ law, which guarantees the central bank’s independence. The revised text also noted that “specific methods for monetary policy are entrusted to the BOJ.” According to a senior official at an economy-related ministry, the prime minister had become increasingly concerned about market reactions. The government also plans to shift the central focus of its fiscal management target away from achieving a primary budget surplus and toward steadily reducing the ratio of outstanding central and local government debt to GDP. A primary budget surplus means the government can fund policy expenditures, excluding debt-servicing costs, without issuing new government debt. Rather than prioritizing year-by-year improvements in the revenue-expenditure balance, the government will place greater emphasis on restoring fiscal health through stronger economic growth. The underlying assumption is that if GDP, the denominator in the debt-to-GDP ratio, expands through growth-oriented investment, the ratio may decline even if the outstanding debt balance continues to rise. Still, Yuichi Kodama, fellow chief economist at Meiji Yasuda Research Institute Inc., expressed concern about a fiscal management strategy that relies heavily on future growth. “Achieving sustained high economic growth is not easy. It has been a challenge successive administrations have struggled with,” he said. END [Copyright The Jiji Press, Ltd.]