The Japanese government announced on Tuesday that it expects a smaller primary balance deficit of ¥1.3 trillion ($9 billion) in fiscal 2025, attributed to increased tax revenue. This updated estimate follows a more optimistic economic growth scenario. However, achieving a surplus is likely to be delayed by a year beyond the country’s original goal. Prime Minister Fumio Kishida’s plans to boost spending on defense and child care add complexity to the challenging task of restoring Japan’s fiscal health, which has been ranked the worst among advanced economies.
Compared to the previous estimate of ¥1.5 trillion in January, the projected fiscal 2025 deficit in the primary balance (tax revenues minus non-debt-servicing spending) has been revised downward. Additionally, the balance is predicted to improve to a ¥2.3 trillion surplus in fiscal 2026, slightly lower than the earlier estimate of ¥2.5 trillion. To achieve this, the Cabinet Office emphasizes the importance of real economic growth of nearly 2% and nominal growth of around 3% over the longer term.
Japan, as the world’s third-largest economy, recorded a 1.4% expansion when adjusted for inflation in fiscal 2022. However, the country has already deferred its primary balance surplus target from fiscal 2020 to fiscal 2025.
Despite the Cabinet Office’s claim that further spending cuts could lead to achieving the target, their base-line scenario, projecting economic growth of approximately 0.5% over the longer term, foresees the restoration of fiscal probity not until fiscal 2032—the final year of the current forecast.
Notably, the projections do not account for plans to increase the state’s child care budget, a priority for Prime Minister Kishida. Details regarding funding security are yet to be finalized. However, the estimates reflect Japan’s planned ¥43 trillion increase in defense spending until fiscal 2027.
Fiscal 2022 saw Japan report a record tax revenue of ¥71.14 trillion, supported by higher corporate tax payments amid the easing of the COVID-19 pandemic shock and rising inflation that boosted consumption tax revenues.
Nevertheless, the rising prices of everyday goods and the prospect of entrenched inflation pose a threat to consumer sentiment and complicate the Bank of Japan’s efforts to maintain ultralow interest rates to achieve stable 2% inflation with wage growth. Real wages in Japan have been declining while inflation has been accelerating, leading to negative effects on consumers.
Based on the latest Cabinet Office projections, consumer prices, a crucial indicator of inflation, are expected to rise by 1.9% in fiscal 2024 and 1.8% in fiscal 2025 before reaching a 2.0% increase in fiscal 2026. During the same period, nominal wage growth per capita, which was 2.6% in the current business year, is expected to slow down to 2.5% in fiscal 2024 before picking up to 2.6% the following year.
Japan’s government debt is over twice the size of its economy, with more than half of it owned by the Bank of Japan (BOJ) as part of the country’s powerful monetary easing policy over the past decade. The BOJ has maintained extremely low borrowing costs to achieve its 2% inflation target, but future interest rate increases will lead to higher debt-servicing costs for Japan. The Cabinet Office predicts nominal long-term interest rates to remain flat at 0.4% for the three years until fiscal 2025.