JAPAN’S government yesterday proposed record spending for next fiscal year while curbing debt issuance, underscoring Prime Minister Sanae Takaichi’s challenge in boosting the economy while inflation remains above the central bank’s target.
Her cabinet approved a draft budget of $783 billion that addresses market jitters by capping bond issuance and reducing the proportion of the budget financed by fresh debt to the lowest in almost three decades.
Also complicating Takaichi’s policy challenge, core inflation in Tokyo stayed above the Bank of Japan’s 2pc target this month while the yen remains weak, bolstering the central bank’s case to keep raising interest rates.
The record 122.3-trillion-yen budget for the year starting in April, a core part of Takaichi’s “proactive” fiscal policy, will likely underpin consumption but could also accelerate inflation and further strain Japan’s tattered finances.
Investor unease about fiscal expansion in an economy with the heaviest debt burden in the industrialised world has driven super-long government bond yields to record highs and weighed on the yen.
“We believe we have been able to draft a budget that not only increases allocations for key policy measures but also takes fiscal discipline into account, achieving both a strong economy and fiscal sustainability,” said Finance Minister Satsuki Katayama.
She told a Press conference the draft budget keeps new bond issuance below 30trn yen ($190bn) for a second consecutive year, with the debt dependence ratio falling to 24.2pc, the lowest since 1998.
The Takaichi government’s efforts to reassure Japanese government bond investors were showing some success.
The 30-year JGB yield fell on Thursday from a record high 3.45pc after Reuters reported the government will likely reduce new issuance of super-long JGBs next fiscal year to the lowest in 17 years. Yields slipped further on Friday on the administration’s efforts at fiscal restraint.
The budget was not as large as initially feared, said Saisuke Sakai, senior economist at Mizuho Research & Technologies. “But political fragmentation raises the risk that Takaichi may resort to a large supplementary budget next year to secure opposition support, keeping alive market concerns that fiscal expansion could push the yen down and accelerate inflation,” he said.
“It’s too optimistic to assume that the current environment will persist.”
The proposed spending is inflated by a jump in debt-servicing costs for interest payments and debt redemption. It also reflects a 3.8pc rise in military spending to 9trn yen ($60bn) as part of the assertive defence policy of Takaichi, a conservative nationalist, and in line with a US push for its allies to pay more for their own defence.
The Tokyo core consumer price index, which excludes volatile costs of fresh food, rose 2.3pc in December from a year earlier, less than market forecasts for a 2.5pc gain and slowing from a 2.8pc increase in November.
The data backs up the central bank’s view that core inflation will slide below its 2pc target in coming months on easing cost pressure, before resuming a more demand-led increase that justifies additional rate increases.
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