Japan expected to fall short of fiscal targets

Japan is anticipated to fall short of its fiscal targets, with the primary budget balance estimated to remain in deficit during the fiscal year 2025-26, according to the Cabinet Office's latest projections. The primary balance, a crucial gauge of the government's ability to finance policies without relying on debt, is expected to show a deficit of 1.1 trillion yens ($7.44 billion), slightly better than the earlier forecast of a 1.3 trillion yens shortfall in July.

Despite ongoing efforts to improve the primary budget, Japan, burdened with the highest public debt among industrialised nations, is grappling with significant challenges, including soaring debt-servicing costs and expenses related to the COVID-19 pandemic. The government's aim to achieve a primary budget surplus, excluding new bond sales and debt servicing costs, by the fiscal year ending March 2026 appears increasingly elusive.

Japan's primary budget has seen persistent deficits since the postwar era, except for a brief period during the asset bubble from 1986 to 1991. The government has repeatedly postponed its target, and the recent Cabinet Office estimates align with private-sector economists' views that the primary budget is unlikely to reach a surplus by the designated year.

The latest projections factor in higher-than-expected nominal GDP growth and spending streamlining, contributing to a marginal improvement in the budget balance. However, increased inflation and stimulus spending in the preceding year have elevated expenditure.

The estimates assume a real GDP growth of 1.3 per cent, a level not consistently achieved in the past decade, along with a 2.0 per cent consumer price index and a 0.9 per cent nominal long-term interest rate. Conversely, maintaining the current growth rate and inflation trajectory could lead to a deterioration, with the primary balance potentially sinking into a 2.6 trillion yen deficit, as per the Cabinet Office's analysis.

(With Reuters inputs)