Japan Economics Comment

Research evidence excerpt

Japan Economics Comment

an its estimated debt-stabilising primary balance (DSPB) (-3.0% of GDP). By contrast, many

regional peers run primary deficits larger than their DSPB. This implies Japan has some fiscal space – roughly 1% of GDP – which

should be sufficient to absorb a tax cut costing around 0.7% of GDP (see Asian Economics Quarterly: Still runnin’, 24 June 2026).

Granted, Japan does not have room for open-ended fiscal largesse. For example, an alternative proposal floated during the February

election to cut the consumption tax on all items from 10% to 5% would cost around JPY15trn, likely placing excessive strain on the

budget (see Japan’s fiscal dilemma: How might new PM Takaichi fund a tax cut?, 21 October 2025). In an environment where

inflation and the global AI capex upcycle are supporting Japan’s corporate sector, a strictly time-limited, two-year tax cut confined to

food items would be unlikely to precipitate severe fiscal stress, provided Takaichi can hold the line on duration as she pledges.2

That said, Prime Minister Takaichi’s 14-year, JPY370trn (USD2.3trn) long-term investment plan — targeting AI, semiconductors,

defence, space, shipbuilding and other sectors deemed critical to economic security — could become an additional source of fiscal

pressure. A draft plan released yesterday indicates it would be financed through a mix of public and private investment, with the

government contributing just under half, assuming inflation stabilises at around 2%.3 Even so, the fiscal implications remain highly

uncertain at this stage. Much will hinge on the precise scale of government outlays and the funding mix — particularly the extent of

any JGB issuance — as well as whether the programme delivers meaningful spillover effects to economic growth.