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Japan’s fiscal health, the worst among advanced nations, is unlikely to improve under its next prime minister, with discussion of the issue noticeably absent in the race to become the ruling Liberal Democratic Party’s new leader this week.
The government has set a target of achieving a surplus in the primary balance — tax revenues minus spending, excluding debt-servicing costs — in fiscal 2025. But without prompt action, achieving it will be elusive, analysts warn, noting that the task of cutting government spending and reducing debt has only gotten more pressing with interest payments rising following the Bank of Japan’s two rate hikes this year, the first in 17 years.
Japan’s outstanding state debt — now more than twice the size of the economy — has been steadily increasing, primarily affected by ballooning social security costs as the population rapidly ages.
File photo taken on July 3, 2023, shows the Bank of Japan head office in Tokyo. (Kyodo) ==Kyodo
It increased more than 100 trillion yen to 1,105 trillion ($7.6 trillion) during Prime Minister Fumio Kishida’s three-year tenure partly because the government had to boost spending in its battle against the COVID-19 pandemic and the cost-of-living crisis following Russia’s war in Ukraine and the yen’s historic depreciation.
Manabu Shimasawa, a public finance professor at Kanto Gakuin University, pointed out that Japan’s tax revenue has increased in recent years as the weak yen has bloated earnings abroad by Japanese firms.
“But the fiscal situation has not improved because the rise in tax revenue has been consumed by voter-pleasing policies,” including utility bill subsidies, under Kishida’s administration, said Shimasawa, a former bureaucrat at the Cabinet Office, which is in charge of economic and fiscal policy.
The government should strive to curb its debt in light of rising bond yields, which have led to increased interest payments and debt redemption costs, as the BOJ aims to advance monetary normalization, Shimasawa said.
“It is possible to achieve a primary balance surplus by raising taxes, but that would place more burdens on working generations,” said Shimasawa, adding that it would be more desirable to aim for fiscal consolidation through spending reductions.
Analysts are closely monitoring the size of a supplementary budget for fiscal 2024, which the government is expected to compile later in the year to implement an economic package under the next prime minister.
While a general election must be held by October 2025, it is highly likely that the new premier will dissolve the House of Representatives for a snap election as early as next month, capitalizing on the relatively high approval ratings new leaders usually enjoy immediately after taking office, political pundits say.
In anticipation of a possible election, many candidates in the LDP leadership race have outlined pledges aimed at reducing voters’ financial burdens, which could lead to increased government spending and debt.
Among contenders popular with the public in media polls, Shinjiro Koizumi has pledged to expand support for low-income households and pensioners through cash handouts while Sanae Takaichi, the current economic security minister in Kishida’s Cabinet, has advocated economic growth driven by government spending.
Meanwhile, Digital Minister Taro Kono has emphasized the need to restore fiscal health, but he is struggling to gain traction in the polls.
Takahide Kiuchi, executive economist at the Nomura Research Institute, said, “It is problematic that fiscal health has not become a key topic in this presidential race.”
Kiuchi, a former BOJ board member, said ballooning government debt, in saddling future generations with the burden of repayment, would undermine expectations for economic growth going forward.
The candidates have to tackle the government’s fiscal health in the medium to long term, rather than focusing on short-term election pledges, Kiuchi said.
“Judging from their discussions, the situation is unlikely to change for the better,” he said.
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