Japanese Economy: Examining the Takaichi Government’s Fiscal Stance

■ The Democratic Party for the People's move closer to the ruling party could reduce policy risks for the Takaichi government.  

■ The 2026 budget is a record high. To curb the expansion of supplementary budgets, is it necessary to clarify fiscal soundness goals?  

 
On the 19th, the ruling party decided on the outline for tax reform in 2026. The biggest challenge in the process was the direction of discussions with the Democratic Party for the People regarding raising the "annual income threshold," which has been ongoing since last year. However, on the 18th, the two parties reached an agreement to raise the income tax exemption threshold to 1.78 million yen. In exchange for implementing the relevant policies, the Democratic Party for the People promised to assist in the passage of tax reform-related bills and the 2026 budget, and stated that it would "actively cooperate" with the establishment of a special bill on national debt in the House of Councilors. However, the content of the consensus reached this time differs significantly from the Democratic Party for the People's initial plan: not only does it set an income limit (for those with an annual income below 6.65 million yen), but it also does not apply to resident tax. As a result, the tax cuts originally estimated by the Democratic Party for the People to be as high as 7-8 trillion yen per year have been reduced to approximately 1.85 trillion yen, according to the Ministry of Finance's calculations. The Democratic Party for the People has shown significant concessions to the ruling party, which is expected to reduce the risks for the Takaichi government in its future policy operations. With a minority ruling party, the opposition's discussions on fiscal discipline may risk becoming merely formalities. 

 
The government plans to decide on the 2026 budget at a cabinet meeting today, the 26th. According to reports, the general budget is projected to be 122.3 trillion yen, exceeding the 115.2 trillion yen of 2025, setting a new record. The budget requests submitted by the ministries and agencies in August this year totaled 122.4 trillion yen; even after consultations between the ministries and agencies and the finance minister, the reductions are almost negligible. Due to the aging population, the increase in social security spending and national debt interest payments is difficult to adjust, and the natural increase is considerable; however, considering the reductions of approximately 2.4 trillion yen in 2025 and 1.8 trillion yen in 2024, a portion of the budget still reflects the Takaichi government's fiscal expansion strategy. Despite this, the Prime Minister stated that the expansion of the 2026 budget was "due to the inclusion of expenditures that could only be included in the supplementary budget in the initial budget." Since the substantial supplementary budget was added in 2020 to address the COVID-19 pandemic, large-scale supplementary budgets exceeding 10 trillion yen annually have become the norm, even after the pandemic subsides in 2023. The practice of including necessary funds in the initial budget and subjecting it to rigorous review, rather than in the short-deliberation supplementary budget, is commendable. However, if strong calls for large supplementary budgets reappear in the fall and reductions fail, the overall budget size still faces the risk of expansion. 

 
To address this fiscal expansion risk, it is necessary to establish a binding force through measures such as setting benchmarks for fiscal discipline. While the Takaichi government has withdrawn its target of achieving a surplus in national and local basic fiscal revenue and expenditure for a single year, it is still necessary to clarify fiscal soundness goals in preparation for the 2026 Basic Policy for Economic and Fiscal Management and Reform (Kita Policy), which is expected to be decided by the Cabinet meeting around June. In the financial markets, rising interest rates and the depreciation of the yen have begun to sound alarm bells, and Japan’s fiscal stance will need to be continuously and cautiously examined going forward.