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🇰🇷 South Korea /Economy & Trade

Japan faces hundreds of trillions of yen fiscal deficit risk next year due to defense spending, tax cuts

From Hankyoreh · () Korean

Translated from Korean, summarized and contextualized by DistantNews.

At a glance

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  • Japan faces a potential fiscal deficit of hundreds of trillions of yen next year due to increased defense spending and tax cuts.
  • The Nomura Research Institute estimates a potential deterioration in the fiscal balance by over 23 trillion yen compared to the previous year.
  • Concerns are rising that the deficit will be financed by issuing deficit-covering bonds, potentially worsening the weak yen and inflation.

Japan is grappling with the prospect of a significant fiscal deficit, potentially reaching hundreds of trillions of yen, in the upcoming fiscal year. This looming financial challenge stems from the government's push for increased defense spending and tax reductions.

The Nomura Research Institute projects a substantial deterioration in the fiscal balance, estimating it could worsen by over 23 trillion yen compared to the previous year. This forecast considers both increased government expenditures and decreased tax revenues. The Ministry of Economy, Trade and Industry is reportedly seeking more than double its previous budget for AI and semiconductor initiatives, while the Ministry of Defense is requesting a record 8.9 trillion yen.

There is no longer a 'ceiling' on the budget.

— Shunichi SuzukiJapan's Finance Minister Shunichi Suzuki publicly declared that there is no longer a budget ceiling, signaling the government's willingness to increase spending.

Adding to the fiscal pressure are planned expenditures for free high school education, rising national debt interest payments, and increased social security costs due to an aging population. The government, under Prime Minister Fumio Kishida, has signaled a willingness to increase spending, with Finance Minister Shunichi Suzuki stating there is no longer a "ceiling" on the budget.

The deterioration in the fiscal balance could reach 23.7 trillion yen compared to the previous year.

— Nomura Research InstituteThe Nomura Research Institute estimated the potential scale of the fiscal balance deterioration in a report on the government's budget.

A major concern is the planned increase in defense spending, potentially raising it to 2.2% of GDP. This alone could add 4.2 trillion yen to expenditures. Furthermore, Prime Minister Kishida's pledge to cut consumption tax on food items, either to zero for two years or through a 7% reduction with a 1% direct refund, is expected to reduce tax revenue by 4.4 trillion yen, with an additional 300 billion yen needed for refunds.

Economists warn that financing these deficits through new bond issuances could exacerbate the weak yen, lead to falling bond prices, and trigger a cycle of inflation and rising long-term interest rates, further reducing tax revenues. There is a call for the government to demonstrate a commitment to fiscal soundness to restore confidence in Japan's finances.

The government needs to show it prioritizes fiscal soundness to restore confidence in Japan's finances.

— Takahide KiuchiTakahide Kiuchi, Chief Economist at Nomura Research Institute, emphasized the need for the government to demonstrate fiscal responsibility.
DistantNews Editorial

Originally published by Hankyoreh in Korean. Translated, summarized, and contextualized by our editorial team with added local perspective. Read our editorial standards.

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