Japan: A Series of Fiscal Events Since June

■ June and July will see a series of important fiscal-related events, including the mid-term summary of the food consumption tax reduction and the release of the "Honebuto Policy".  

■ Although market concerns surrounding the supplementary budget have temporarily eased, vigilance against fiscal expansion may resurface. 
 
Influenced by market concerns about fiscal expansion triggered by the government's supplementary budget and anxieties about the Bank of Japan's (BOJ) potential delays in responding to rising prices, the 10-year government bond yield rose to over 2.80% on May 20, reaching a new high since October 1996. Subsequently, Prime Minister Sanae Takaichi stated regarding the supplementary budget needed to extend and expand energy subsidies: "The target is a scale of over 3 trillion yen, utilizing sources such as unexpected tax revenue growth to avoid issuing additional deficit bonds." This temporarily alleviated market concerns about excessive fiscal deterioration, and the rapid rise in yields stabilized. However, several important fiscal-related events will take place after June, and market vigilance against fiscal deterioration may resurface. The following will briefly confirm the noteworthy (1) interim summary of the food consumption tax reduction and (2) the Basic Policy of Economic and Fiscal Operation and Reform (Honebuto Policy). 
 
  (1) Interim summary of the food consumption tax reduction: The cross-party organization "National Conference on Social Security" will release its interim summary report in June. It is expected that the Prime Minister will make a final decision on whether to implement the consumption tax reduction as early as June, following a review of the report. According to media reports, compared with the plan to reduce the consumption tax rate to 0%, the plan to reduce the tax rate to 1% is more likely to be the final choice because it can shorten the time required to transform the cash register system and enable faster implementation. Once a final decision is made, the Prime Minister is expected to submit the tax reform bill promptly. If the bill can be submitted during the special parliamentary session that ends on July 17, it is expected to align with the implementation of the tax reduction starting in fiscal year 2027. The consumption tax reduction plan is positioned as a temporary measure to be implemented for two years before the introduction of a tax credit system with attached income subsidies. In principle, it will not rely on deficit national debt as a source of revenue. However, market concerns about the tax reduction's permanence persist. As a follow-up measure, the tax credit system for income subsidies is currently moving towards temporarily suspending tax credit implementation and prioritizing the issuance of subsidies linked to income levels. Discussions about the mechanism for implementing consumption tax reductions are also worth noting. 

 
(2) Basic policy on economic and fiscal operations and reform (the "Honebuto policy"): This policy is used to clarify the government's important policy issues and the direction of budget preparation for the next fiscal year. It is usually approved by the Cabinet meeting around June each year. This release may be postponed to July. As this "Honebuto policy" will include the growth strategy that the Prime Minister is focusing on, it has attracted much attention. Regarding growth investment, it was originally planned to use a multi-year budget. Still, it has been reported that it will be changed to raise funds through transitional government bonds. Transitional government bonds are government bonds issued in advance, on the premise that the source of repayment funds (such as tax increases or new insurance premium income) can be determined in the future and guaranteed by law. Their role is to fill the funding gap until the formal funding source is implemented. However, such government bonds will eventually be issued as ordinary government bonds. Therefore, even if some budgets allocate the necessary funding, it is difficult to eliminate market concerns about the fiscal situation completely. It is expected that the current policy will not directly address the issue of fiscal scale, but market concerns about the long-term nature of fiscal risks may persist.