Japan continues to predict it can balance its budget in the year starting April 2026 under a high-growth scenario, despite plans to ramp up defense spending over the coming years.
(Bloomberg) — Japan continues to predict it can balance its budget in the year starting April 2026 under a high-growth scenario, despite plans to ramp up defense spending over the coming years.
The optimistic scenario released Tuesday by the Cabinet Office assumes real gross domestic product will grow around 2% annually in the medium and long term, and that tax revenues will continue to rise. That scenario compares with average growth of around 0.6% in the last 10 years, separate figures show.
The forecasts suggest the balancing of the primary budget won’t be pushed back by what Prime Minister Fumio Kishida has said is a historic strengthening of Japan’s defense capabilities, a factor that is likely to add to skepticism over the projections among economists.
A sustainable source of funding for the extra defense spending has yet to be agreed by the ruling parties.
A more realistic growth scenario, meanwhile, shows the government’s red ink will continue through fiscal 2032, a projection even more at odds with the finance ministry’s stated goal of balancing the budget, excluding debt servicing costs, by fiscal 2025.
“It’s important to aim for fiscal health, but it’ll be difficult to achieve a primary balance in fiscal 2025 or 2026,” said Yuichi Kodama, chief economist Meiji Yasuda Research Institute before the forecasts were released, adding that the projections will likely need to be revised.
“The plan now is to pour whatever extra money we have into defense, so in the end we’ll likely have to issue more government bonds,” he said.
The Cabinet Office first brought forward its balanced-budget forecast to fiscal 2026 in January 2022, but the latest projections remain largely unchanged from last July.
Since then, Kishida revealed that he aims to boost defense spending to 43 trillion yen ($330 billion) over the next five years, abandoning a decades-old cap on military costs to 1% of gross domestic product.
Finance Minister Shunichi Suzuki continued to stress the importance of aiming to reach a primary balance by the year ending March 2026 in his speech to parliament Monday.
Opposition parties have vowed to grill Kishida in the parliamentary session that started this week over how he will fund the biggest expansion in defense spending since Japan’s World War II defeat.
He has yet to forge a consensus even within his own ruling Liberal Democratic Party, after some lawmakers called for more bond issuance to make up the shortfall and avoid an unpopular tax increase.
Slumping Support
The premier — whose voter support has slumped to record lows under 30% in some recent polls — has repeatedly said he wants to avoid burdening future generations with the added costs and tasked party policy chief Koichi Hagiuda with finding ways of paying for the plans.
The task of selling proposed tax hikes on corporations, individual incomes and tobacco may be further complicated by fading public enthusiasm for strengthening the military.
While Russia’s invasion of Ukraine initially increased public support in Japan for ramped-up defense spending, a survey by the Yomiuri newspaper published Jan. 16 found 43% of respondents now approved of the idea, compared with 68% in a similar poll in November. Only 28% approved of tax hikes to fund defense spending.
The survey also showed a majority against raising taxes to fund Kishida’s pledge to double spending on children as he seeks solutions to the slumping birthrate.
The premier reiterated in a speech on Monday that he would lay out a framework for the plan by June, saying the aging country is “on the brink of being unable to function as a society.”
–With assistance from Keiko Ujikane.
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.