Japan’s government on Friday proposed record spending for the next fiscal year while reducing debt issuance, underscoring Prime Minister Sanae Takaichi’s challenge to stimulate the economy as inflation remains above the central bank’s target.
His cabinet approved a $783 billion budget bill that aims to address market jitters by limiting bond issuance and reducing the proportion of the budget financed by new debt to the lowest level in nearly three decades.
Further complicating Takaichi’s policy challenge is that core inflation in Tokyo has remained above the Bank of Japan’s 2% target this month, while the yen remains weak, strengthening the central bank’s case for continuing to raise interest rates.
The record 122.3 trillion yen budget for the year starting in April, a key part of Takaichi’s “proactive” fiscal policy, will likely support consumption but could also accelerate inflation and put further pressure on Japan’s already weakened finances.
DELICATE BALANCE BETWEEN BUDGETARY SUPPORT AND DEBT CONTROL
Investor unease over fiscal expansion in an economy with the highest debt ratio in the industrialized world has pushed yields on ultra-long-term government bonds to record highs and weighed on the yen.
“We believe we have succeeded in crafting a budget that not only increases allocations for important policy measures, but also takes into account fiscal discipline, thereby enabling a strong economy and fiscal sustainability,” Finance Minister Satsuki Katayama said.
She told a news conference that the proposed budget kept new bond issuance below 30 trillion yen for the second year in a row, with the debt dependency rate falling to 24.2 percent, the lowest since 1998.
The Takaichi government’s efforts to reassure investors in Japanese government bonds have borne fruit.
The yield on Japan’s 30-year Treasury Bonds (JGBs) fell from a record low of 3.45% on Thursday, after Reuters reported that the government would likely cut the issuance of new ultra-long-dated JGBs in the next financial year to the lowest level in 17 years. Yield rates fell further on Friday due to government efforts to restrain fiscal spending.
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