Download
Key takeaways
- The Ministry of Finance (MOF) released figures on ministerial budget requests for FY2027.
- However, when questioned in a press conference about how the government will fund the budget in light of rising interest rates and US pressure, Finance Minister Katayama Satsuki obfuscated on the details of bond issuance and even whether the US has actually pressured Japan on macroeconomic policy.
- The key figure to watch may be the total amount of spending included in the government’s new “Strong and Prosperous Japan investment framework,” which the government intends to support with “bridging bonds” while excluding it from the calculation of the fiscal balance.
The Ministry of Finance (MOF) confirmed on Friday, 4 September that the initial budget requests from ministries for FY2027 totaled roughly JPY 143.1tn. While this is significantly higher than past general budgets, the government has insisted that this total should be compared to overall spending – general budgets plus necessary spending that has been included in regular supplemental budgets, a practice the Takaichi government intends to phase out – and so the budget is only JPY 2.5tn more than the combined FY2025 supplemental and FY2026 general budget by the government’s reckoning.
However, beyond confirming the overall total, Finance Minister Katayama Satsuki’s press conference on 4 September did little to clarify the biggest questions about the government’s budget. She was asked multiple questions about the government’s plans for bond issuance in light of the increase in long-term interest rates, and, over the course of several rambling answers, said:
“We will determine the appropriate amount” to be issued in light of the government’s goal to steadily reduce the debt-to-GDP ratio, about which the government has “received a great deal of understanding” in bilateral and multilateral meetings;
Asked about a statement by Prime Minister Takaichi Sanae that she wants to limit deficit bond issuance to JPY 40tn, Katayama said she “always takes note” of what the prime minister says and added that the government’s policy is “to appropriately control the total amount of government bond issuance for the year through the initial budget and supplementary budget while also firmly addressing necessary fiscal needs”;
When asked about the government’s conflicting messaging – that it is simultaneously breaking free of “excessive austerity” and that the government’s budget is not actually significantly larger – she gave a long, meandering answer about the reason for ending the dependence on supplemental budgets that did not address the question she was asked;
She was also pressed about messaging from US Treasury Secretary Scott Bessent on Japan’s macroeconomic policies, and even after reporters shared Bessent’s direct quotes from a press conference, she questioned the meaning of “reflation” as used by Bessent and denied that he had made “unilateral policy demands.”
In other words, the Takaichi government has continued to avoid clear messaging about the scale of its FY2027 budget and its plans for funding the increase of spending. The government is still gesturing towards “maintaining market confidence” and its commitment to its fiscal sustainability goal, but this press conference shows that the government’s approach is riddled with contradictions. Katayama’s press conference also demonstrated again that Takaichi’s budget is driven not by macroeconomic goals but by strategic and supply-side goals.
Perhaps the clearest message about the Takaichi government’s budget is what MOF revealed about spending through the government’s new “Strong and Prosperous Japan investment framework,” the vehicle for the government’s strategic priorities for which no ceiling was imposed on ministerial requests. MOF reported that these requests totaled JPY 12.2tn, with the largest portions coming from the Ministry of Economy, Trade, and Industry (METI; JPY 4.53tn), Ministry of Education, Culture, Sports, Science and Technology (MEXT; JPY 2.2tn), and the Ministry of Land, Infrastructure, Transportation, and Tourism (MLIT; JPY 1.58tn). This total seems all but guaranteed to grow during the budgetary negotiations, since the line for the Ministry of Defense (MOD) leaves the box for the “Strong and Prosperous Japan investment framework” blank in light of the pending revision of Japan’s three national security documents. The government has repeatedly emphasized the growth of Japan’s defense industry and the importance of dual-use technologies, and the MOD’s request refers to seeking funding through the framework as part of its desire to “realize a virtuous cycle of defense and economy,” so it is highly unlikely that this space will remain blank in the final draft.
The final total included in the new investment framework matters because the government has said that this spending will be supported by “bridging bonds” – though earmarked not against specific future revenue sources but future tax revenue generation from projects evaluated for their future profitability or contributions to Japan’s strategic autonomy and indispensability. This framework will not be included in calculations of the government’s fiscal balance. This new spending could be funded by bonds that will be part of the government’s overall issuance (and could therefore have implications for interest rates) but will not contribute to the government’s own measurement of the deficit and debt-to-GDP ratio. Because these bonds will not be “deficit bonds” in legal terms, they may also enable Takaichi to stick to her pledge to limit the increase in deficit bonds. The upshot is that as the Takaichi government finalizes its budget through the end of the year, it is important to monitor the overall number as well as the fate of the JPY 12.2tn investment framework budget, which is poised to grow over the course of budgetary deliberations.
The Takaichi government’s communication strategy about its budget is unlikely to change for the foreseeable future, both because the prime minister is determined to deliver her “revolutionary” new plan and because, according to reporting on Friday, 4 September, she is likely to keep Katayama on as finance minister after the cabinet reshuffle.