Japanese Prime Minister Shigeru Ishiba's New Spending Plans

By Leika Kihara

TOKYO (Reuters) – Japanese Prime Minister Shigeru Ishiba's administration has pledged to draft another big spending package, moving away from fiscal discipline, likely increasing borrowing.

Deputy Chief Cabinet Secretary Kazuhiko Aoki announced at a news conference on Wednesday that the government will prepare a package exceeding the size of last year's stimulus.

During an election campaign speech on Tuesday, Ishiba stated the goal is a spending package funded by a supplementary budget that surpasses last year's 13 trillion yen ($87 billion).

Such significant spending would isolate Japan among advanced economies that have largely phased out crisis-mode stimulus. This occurs as the Bank of Japan raises interest rates from near-zero levels, increasing the cost of funding for Japan's public debt, which is already double its economic size.

While expectations of a slow approach to raising borrowing costs by the BOJ have kept 10-year Japanese government bond (JGB) yields below 1%, analysts warn that further debt issuance might impact bond market sentiment negatively.

According to Katsutoshi Inadome, senior strategist at Sumitomo Mitsui Trust Asset Management, “Some (players) became cautious of buying JGBs as concern emerged over the risk of increasing debt issuance.”

Furthermore, the shrinking probability of Japan achieving a primary balance surplus by fiscal 2025 may also pressure bond prices, he added.

Analysts at SMBC Nikko Securities predict that the government will need to issue over 10 trillion yen in new debt to support a supplementary budget exceeding 13 trillion yen this year, atop 182 trillion yen worth of JGBs scheduled for sale under the current fiscal year’s budget.

Traditionally, Japan has utilized supplementary budgets, usually worth a few trillion yen, to manage one-off emergency spending, like disaster relief. This practice changed in 2020 when the budget grew to 73 trillion yen to tackle the COVID-19 pandemic, continuing to create large, primarily debt-funded supplementary budgets thereafter. Last year, nearly 9 trillion yen of the 13 trillion yen spending was financed through new debt.

Once regarded as a fiscal and monetary hawk, Ishiba has softened his previous stances on Japan weaning off the extensive stimulus known as “Abenomics,” initiated by late former premier Shinzo Abe. Since assuming office on October 1, Ishiba has highlighted a commitment to revitalize the economy to escape the growth-stifling deflation experienced over the last three decades.

Although analysts generally do not foresee the ruling coalition losing power in the scheduled general election on October 27, some anticipate a challenging battle that may pressure Ishiba to please voters with significant spending promises.

Japan’s public debt remains the highest among advanced nations. As per Japan’s finance ministry estimates, its government spending to GDP ratio stands at 42.3%, compared to the U.S. at 37.0% and the G7 average of 41.2%.

($1 = 149.2700 yen)