Japan's budget plans raise viability worries

Japan's record-high budget requests for fiscal 2027, coupled with rising long-term interest rates and plans for further spending and a food consumption tax cut, have raised concerns over the sustainability of Prime Minister Sanae Takaichi's fiscal policy.

Experts warn that spending without stable funding could add to Japan's debt burden, narrow future fiscal options and pose risks to financial stability and household livelihoods.

Budget requests from ministries and agencies reached about 143 trillion yen ($918 billion), a fourth straight record, according to Finance Ministry data released on Friday. The figure reflects a new approach that brings spending previously covered by supplementary budgets into the regular budget process.

Yangchoon Kwak, a professor at Rikkyo University's College of Economics, said expanding spending without secured funding amid rising interest rates "could be described as an abandonment of fiscal discipline".

He called for less reliance on supplementary budgets and a review of programs with unclear results.

"The standard for evaluating fiscal spending should shift from 'how much money was spent' to 'what results the spending produced,'" Kwak told China Daily.

After the 10-year Japanese government bond yield reached 3 percent for the first time since 1996, the Finance Ministry raised the rate used to estimate debt costs from 3.0 percent to 3.8 percent. Debt-related requests reached a record 36.64 trillion yen, up 5.36 trillion yen from the current fiscal year.

Takahide Kiuchi, executive economist at Nomura Research Institute, said the final budget could grow further because some requests have yet to be assigned specific amounts.

Japan's Defense Ministry requested a record 8.84 trillion yen, while some projects linked to the ongoing revision of Japan's three key national security documents were submitted without specific amounts, according to Japanese media.

Weakening discipline

The Nikkei said in an editorial that the record budget requests showed weakening fiscal discipline under the Takaichi administration.

It also questioned the government's plan to cut the consumption tax on food while increasing spending, criticizing it for pledging not to rely on deficit-covering bonds without explaining how the measures would be financed.

In early August, Japan's Cabinet approved a plan to cut the consumption tax on food and beverages from 8 percent to 1 percent for two years starting in April 2027. Related legislation is expected to be submitted to the Diet, or Japan's legislature, this autumn.

Kiuchi estimated that the tax cut would reduce government revenue by about 4.4 trillion yen a year and said finding alternative funding would be "extremely difficult".

Kwak said the tax cut could provide immediate relief to households but worsen public finances and put pressure on social security over the longer term.

He said higher-income households would receive larger benefits in absolute terms because they spend more. He also warned that the two-year limit could distort consumption patterns, while the 1 percent rate could impose additional system-adjustment costs on businesses.

Kwak said the government has offered no clear economic rationale for setting the rate at 1 percent for two years, calling the measure a politically driven stopgap partly shaped by electoral considerations.

A Teikoku Databank survey of 195 major food manufacturers found that prices of 4,923 food items are set to rise in September, about three times the number a year earlier. Higher oil prices, a weaker yen and rising import and packaging costs have added to pressure on producers.

Hiroshi Onishi, an emeritus professor at Kyoto University and vice-chairman of the World Association for Political Economy, said cutting the tax could help households, but without a stable replacement for lost revenue, continued increases in government spending, including on defense, could put further upward pressure on Japanese government bond yields.

With Japan already carrying a massive government debt burden, higher rates will gradually increase government interest costs, he said. Because government bonds have different maturities, however, the full impact will take time to emerge.

"The more serious problems are still ahead," Onishi said.

houjunjie@chinadaily.com.cn