TOKYO, Dec 26 (Reuters) – The Japanese government on Friday proposed record spending for the next fiscal year while restricting debt issuance, highlighting Prime Minister Sanae Takaichi’s challenge of boosting the economy while inflation remains above the central bank’s target.
His cabinet approved a $783 billion budget bill that addresses market jitters by limiting bond issuance and reducing the proportion of the budget financed by new debt to the lowest level in nearly three decades.
Further complicating Takaichi’s political challenge, core inflation in Tokyo has remained above the Bank of Japan’s 2% target this month while the yen remains weak, bolstering the central bank’s case for continuing to raise interest rates.
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The record 122.3 trillion yen budget for the year starting in April, a key part of Takaichi’s ‘proactive’ fiscal policy, will likely support consumption but could also accelerate inflation and put further pressure on Japan’s already weakened finances.
DELICATE BALANCE BETWEEN BUDGET SUPPORT AND DEBT CONTAINMENT
Investor unease over fiscal expansion in an economy with the highest debt load in the industrialized world has driven yields on super-long government bonds to record levels and weighed on the yen.
“We believe we have managed to craft a budget that not only increases allocations for important policy measures, but also takes fiscal discipline into account, achieving both a strong economy and fiscal sustainability,” said Finance Minister Satsuki Katayama.
She told a press conference that the draft budget keeps new bond issuance below 30 trillion yen for the second year in a row, with the debt dependency ratio falling to 24.2%, the lowest since 1998.
The Takaichi government’s efforts to reassure investors in Japanese government bonds were showing some success.
The Japanese 30-year Treasury bond (JGB) yield fell on Thursday from a record high of 3.45%, after Reuters reported that the government will likely reduce issuance of new super-long-dated JGBs in the next fiscal year to the lowest level in 17 years. Yield rates fell further on Friday due to government efforts to restrict fiscal spending.
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(Reporting by Leika Kihara; additional reporting by Satoshi Sugiyama, Yoshifumi Takemoto and Makiko Yamazaki)
