Japan’s Economy: Confirmation of the Takaichi Administration’s Fiscal Policy

■ The supplementary budget is expected to focus on eliminating the temporary gasoline tax rate and increasing defense spending.  

■ In the long term, the design of a new tax credit system for additional benefits will be key to effectively implementing family support policies. 

   Following the establishment of the Takaichi Cabinet, the Nikkei Average surpassed 50,000 points on October 27, fueled by expectations of fiscal expansion under a “responsible and proactive fiscal policy.” However, in her policy speech on October 24, Prime Minister Takaichi also stressed the importance of reducing the government debt-to-GDP ratio and maintaining fiscal sustainability. Given current personnel appointments and coalition negotiations, a substantial increase in spending appears unlikely at this stage, and fiscal discipline is expected to be maintained. This report briefly outlines the anticipated direction of fiscal policy going forward. 

   As in previous years, the supplementary budget for fiscal 2025 and the initial budget for fiscal 2026 will be formulated between autumn and the end of the year. The fiscal 2025 supplementary budget is expected to include immediate price-control measures, such as abolishing the old temporary gasoline and light oil tax rates; increasing fees for public services such as medical and nursing care to address inflation; providing subsidies to local governments; and expanding the defense budget. In her policy speech, Prime Minister Takaichi announced that the government’s target of raising defense spending to 2% of GDP (previously set for fiscal 2027) will be advanced. Defense spending is projected to reach approximately 8.7 trillion yen in fiscal 2025, or 1.8% of GDP. Meanwhile, eliminating the temporary gasoline tax rate is expected to reduce revenue by about 1.5 trillion yen, while the increase in defense spending will exceed 1.1 trillion yen. These two items are expected to form the core of the supplementary budget. The direction of the initial budget for fiscal 2026 remains uncertain, but it is likely to include “crisis management investments” such as economic security, food security, and energy security—key pillars of Takaichi’s growth strategy. Regarding the closely watched proposal to raise the annual income threshold for income tax exemption, the current non-taxable limit with income restrictions has been lifted to 1.6 million yen. If it were further raised to 1.78 million yen, as advocated by the Democratic Party for the People, an additional 5 to 6 trillion yen in funding would be required. The ruling Liberal Democratic Party remains cautious about implementing such a full increase, making future discussions with the Democratic Party for the People a focal point of attention. 

   A major long-term policy challenge is the design of a new tax credit system for additional benefits. The proposed system would refund part of the income tax deduction to households while combining it with cash subsidies for low-income earners. By linking subsidy eligibility to income data, the system aims to provide adequate support to households in genuine need while reducing benefits for those who do not require assistance. In recent years, the government has repeatedly introduced subsidy programs for “households exempt from resident tax,” but these have often included pensioners with substantial assets, raising concerns about policy effectiveness. Although institutional reform will take time, incorporating this system into the fiscal 2026 initial budget remains difficult. In the longer term, however, the institutional design and supporting infrastructure will be crucial to implementing effective and targeted family support policies.