Japan: Delayed Implementation of Fiscal Funding Exacerbates Concerns of Fiscal Deterioration

■ While the government is gradually clarifying the direction of growth investment and consumption tax cuts, discussions regarding fiscal sources have been postponed.  

■ The repeated delays in discussions about fiscal sources are accompanied by the risk of further escalating market concerns about fiscal deterioration. 
 
On the 24th, the Economic and Fiscal Policy Council and the Japan Growth Strategy Council held a joint meeting, where the government proposed an investment plan to achieve a total of over 370 trillion yen (approximately 50% of GDP) in 17 strategic areas by 2040. By sector, by 2040, investments in artificial intelligence (AI), semiconductors, digitalization and cybersecurity, and information and communication technologies will reach 186 trillion yen, while investments in synthetic biology, biotechnology, innovative drugs, and advanced medicine will reach 98 trillion yen, with the latter two sectors representing particularly large investments. The meeting did not specify the exact amount to be borne by the government in the public-private investment. However, according to the Cabinet Office's mechanical calculations, actual government spending is estimated to be approximately 10 trillion yen annually (approximately 1.5% of GDP). Furthermore, Prime Minister Takaichi stated that, in order to implement investments that contribute to economic growth, the upper limit on budget requests from various ministries and agencies will be removed during the 2027 budget preparation process. Details are expected to be included in the "Basic Policy on Economic and Fiscal Management and Reform (Kita Policy)" to be released in July. However, these investment funds will be managed by a special accountant independent of general accounting, and the funding is expected to be arranged through the issuance of "transitional government bonds," effectively shifting the fiscal burden further. In addition, last week, the National Conference on Social Security working group released a mid-term summary plan proposing a 1-percentage-point reduction in the food consumption tax rate for two years, starting in April 2027. However, specific plans regarding the source of funding for this tax reduction have been postponed until the 2027 budget preparation. The market is currently observing how the Takaichi "responsible and proactive fiscal policy" will be implemented. However, repeated delays in discussions of fiscal sources risk further escalating market concerns about Japan's fiscal deterioration. 
 
Meanwhile, the "Main Opinions" from the Bank of Japan's (BOJ) monetary policy meeting held on June 15-16, released on the 24th, showed that the government held a cautious attitude towards BOJ interest rate hikes. Internally, the BOJ believed that while downside risks to domestic and international economic growth had weakened, upside risks to inflation were increasing, making a June rate hike reasonable, and most committee members supported further rate hikes.  
 

   In stark contrast to the internal BOJ opinions, the government representatives present at the meeting stated, "The future transition to a growth-oriented economy is crucial, and it is necessary to continue to carefully assess the relationship between macroeconomic supply and demand changes and prices," expressing a cautious stance on this and subsequent rate hikes. They also expressed hope that the BOJ would "implement appropriate policy operations based on a full understanding of the Takaichi Cabinet's policy initiatives, such as crisis management investment and growth investment." It is expected that the BOJ will continue to be constrained by the government regarding interest rate hikes. Against the backdrop of persistent inflation and rising concerns about fiscal expansion, if the market further recognizes the risk of BOJ policy lag, long-term Japanese government bond yields will face further upward pressure.