Japan's government finalized its 'Honebuto Policy' during a cabinet meeting on July 21, outlining key policies and budgetary directions for the upcoming year. This marks the first Honebuto Policy established since the administration of Prime Minister Sanae Takaichi took office. The plan includes over 370 trillion yen (approximately $3.36 trillion) in public and private investments in strategic sectors such as artificial intelligence (AI) and semiconductors by the fiscal year 2040, while also retracting the goal of achieving a primary budget surplus in a single year.
The Takaichi administration aims to formalize 'responsible active fiscal policy' as the guiding principle for economic and fiscal management, with a target of achieving real economic growth exceeding 1% and nominal growth surpassing 3%. However, amid rising long-term interest rates and controversy over the government's influence on the Bank of Japan's rate hikes, language regarding the independence of the Bank of Japan was added at the last minute.
According to reports from Yomiuri Shimbun and others, the Japanese government plans to invest over 370 trillion yen in 62 products and technologies across 17 strategic sectors, including AI, semiconductors, quantum technology, and next-generation energy, by the fiscal year 2040. To support this, a new 'Strong and Prosperous Japan' investment budget will be established, allowing for concentrated budget allocations over multiple years in growth sectors. The government aims to increase private capital investment to 250 trillion yen annually by 2040 and expand nominal GDP to nearly 1,100 trillion yen.
This separate budget will not impose a cap on budget requests, marking a shift from the previous approach of uniformly restraining overall expenditures. The government has designated the fiscal year 2027 as the 'first year of responsible active fiscal policy' and is preparing a long-term economic and fiscal plan looking ahead to 2040. Ongoing projects will be reflected in the initial budget, while supplementary budgets will be limited to urgent matters such as disasters and economic crises.
The goals for fiscal management have also undergone significant changes. The primary balance (PB), a key indicator of fiscal consolidation for national and local governments, will no longer aim for a single-year surplus but will be managed over multiple years. Temporary deterioration of the PB due to economic fluctuations or investment needs will be permitted.
Instead, the government has set a core objective of steadily reducing the national debt-to-GDP ratio. The plan is to grow the economy through government investment, thereby increasing GDP and lowering the debt ratio. The term 'fiscal consolidation,' used since the first Honebuto Policy in 2001, has been replaced with 'ensuring fiscal sustainability.'
Takaichi stated, "We will break the trend of excessive austerity and lack of future investment and significantly expand domestic investment." While the government maintains that it is not weakening fiscal discipline, concerns have arisen that active fiscal policy could lead to increased government bond issuance, especially given that Japan's debt-to-GDP ratio is the highest among the G7 nations. The government has pledged to ensure that the scale of bond issuance does not undermine market confidence and to transparently explain its fiscal management policies.
Language related to the Bank of Japan's monetary policy was also modified from the original draft. The draft released at the end of June included a statement emphasizing the importance of appropriate monetary policy management to achieve a strong economy. This led to interpretations in the market that the Takaichi administration was attempting to control the Bank of Japan's interest rate hikes. The removal of the term 'fiscal consolidation' resulted in a sell-off of government bonds, rising long-term interest rates, and a decline in the value of the yen, a phenomenon referred to as the 'Honebuto Shock.' The yield on Japan's 10-year government bonds surged to 2.9% on July 9, the highest level in nearly 30 years since 1996. Long-term interest rates, which were around 1.6% when the Takaichi administration took office last October, are now fluctuating around 2.7%.
To calm market anxieties, the final policy document includes a footnote citing Article 3 of the Bank of Japan Law, stating, "The specific means of monetary policy are entrusted to the Bank of Japan." Minister of Economic and Fiscal Policy, Minoru Kawai, explained at a press conference on July 21 that this footnote was one of the revisions reflecting the opinions and concerns of the ruling party. Asahi Shimbun noted that it is unusual for the government to emphasize the independence of the Bank of Japan, a self-evident principle.
However, despite the addition of language regarding independence, the Takaichi administration's commitment to active fiscal policy remains unchanged. Shotaro Kugo, a senior researcher at the International Monetary Fund, told Asahi Shimbun, "This Honebuto Shock is evidence that the financial market is concerned about the Takaichi administration's fiscal management. How the market's warnings are reflected in future policies will be crucial."
* This article has been translated by AI.
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