Fitch Ratings is set to closely examine Japan’s budget for the next fiscal year as it assesses whether Prime Minister Sanae Takaichi’s growth-focused spending plans can be balanced with the government’s need to maintain fiscal discipline. The assessment will focus on the composition of the final budget proposal and the direction of Japan’s primary balance, according to Jeremy Zook, senior director of Asia-Pacific sovereign ratings at Fitch Ratings, who spoke to Reuters.
Japan’s budget requests for the upcoming fiscal year have reached a record level, partly because of a new budgeting framework that combines initial and supplementary budget spending. At the same time, government borrowing costs have increased as the administration pursues an expansionary fiscal policy aimed at supporting investment and economic growth. These developments have increased the importance of determining whether additional government spending can be accommodated without creating renewed pressure on Japan’s fiscal position.
Zook said Fitch would examine how the final budget balances what the administration describes as responsible fiscal policy with its more proactive approach to supporting economic activity. He said the composition of the final proposal would provide important information about the government’s policy direction. Fitch will pay particular attention to the primary balance, which excludes debt-servicing costs and provides an indication of whether government revenues are sufficient to cover spending without adding further pressure to public debt.
The primary balance is considered an important measure of Japan’s fiscal position because it provides a clearer view of the relationship between government revenues and expenditure before interest payments on existing debt are taken into account. Zook said establishing a firm assessment of the primary balance would be particularly important for understanding the direction of the government’s fiscal policy under Takaichi.
Despite the government’s more expansionary fiscal stance, Fitch currently expects Japan’s debt-to-gross domestic product ratio to continue declining over the next five years. The ratings agency expects stronger nominal economic growth and higher tax revenues to support the reduction in the debt ratio. However, Fitch expects the ratio to stabilise after that period, meaning the longer-term fiscal impact of current spending and investment policies will remain an important consideration.
Much of the assessment could depend on the performance of Takaichi’s investment programme, which aims to increase Japan’s growth potential through public and private sector investment in strategic industries. The programme forms part of the government’s broader effort to encourage economic expansion and strengthen investment in areas considered important to Japan’s future growth.
Zook noted that governments around the world are increasingly using fiscal policy to support investment and economic expansion. However, he also pointed out that industrial policies have historically produced mixed results. The effectiveness of Japan’s strategy will therefore depend not only on the amount of government support provided but also on how investment decisions are made and whether resources generate sustainable economic returns.
According to Zook, allowing the private sector to take a leading role in determining where investment flows should be directed could improve the chances of the policy achieving its intended objectives. Fitch is continuing to assess the government’s investment programme and is also examining whether its 17 priority investment areas would benefit from greater concentration of resources.
The budget review comes as Fitch continues to monitor Japan’s sovereign credit position. In January, the ratings agency reaffirmed Japan’s sovereign credit rating at A with a stable outlook. The rating remains five notches below the top AAA level, while the Business Recorder report notes that Japan’s Fitch rating is one notch below the A+ rating assigned by S&P and the A1 rating assigned by Moody’s.
The upcoming budget will therefore provide an important indication of how Japan intends to balance economic expansion with fiscal sustainability. Fitch’s assessment will focus on government spending priorities, the primary balance, debt dynamics and the effectiveness of the planned investment strategy as the administration seeks to strengthen growth while maintaining confidence in the country’s public finances.
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