Japan broke all previous records with its budget demands for the upcoming fiscal year, surpassing USD 800 billion, the Asian country’s Finance Ministry announced. The world’s fourth largest economy struggles to contain spending as debt servicing costs climb.
Tokyo’s attempts to bring back fiscal restraint may be hampered by a fresh leadership contest, since choosing the ruling party’s new leader this month runs the risk of calling an early parliamentary election. This also applies to the next prime minister.
The Bank of Japan is moving away from its stimulus programme that has lasted for ten years, as evidenced by the record 117.6 trillion yen (USD 811.93 billion) in budget requests. This implies that the government is no longer able to depend on extremely low borrowing costs and on the central bank to essentially finance debt.
As per the finance ministry, the assumed interest rate is expected to rise from 1.9% to 2.1% for the year beginning in April 2024. This would increase debt-servicing costs for interest payments and debt redemption, which will reach 28.9 trillion yen from 27 trillion yen for the current year.
“An economic package likely to be compiled under the next prime minister, including whether to extend energy subsidies, will show the new leader’s stance on fiscal discipline,” Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said.
The minister of digital transformation and a candidate for the position, Kono Taro, called the current fiscal situation an “emergency situation” and stated that Japan needs to restore fiscal discipline.
Takayuki Kobayashi, another contender, announced that he would introduce a new package to help alleviate the burden of growing costs.
“The economy should be prioritised over finance,” he said.
Another candidate, Toshimitsu Motegi, declared that he would support a large stimulus package to guarantee the economy keeps improving.
“With a looming lower house election ahead, calls for more spending could grow,” Saisuke Sakai, senior economist at Mizuho Research and Technologies, said.
A failure to streamline spending would make it difficult to achieve a primary budget surplus, he added.
Meanwhile, in some good news for the country, its services activities expanded further in August 2024, helped by overseas sales as it gained an edge despite the darkening global outlook, according to a private sector survey.
The final Au Jibun Bank Services Purchasing Managers’ Index (PMI) came in at 53.7, unchanged from the initial reading and above the 50.0 line, separating expansion from contraction for the second month in a row. The headline figure was aligned with July’s reading, but service companies saw a slowdown in new business growth compared to the previous month.
However, export sales rebounded from a contraction in July to the largest rise in three months, supporting overall service-sector business.
The manufacturing sector, on the other hand, contrasted a different picture as it witnessed its poorest exports in five months due to weak demand in China, South Korea, and other major markets.
As per the government data, Japan’s export growth was below expectations in July 2024, underlining growing risks of further deceleration due to a stronger yen and softer conditions.
Weak global demand is clouding the prospect for the Asian country’s sustainable economic growth, while the Bank of Japan policy tightening has promised more rate hikes if the economy and inflation match up to its forecasts.