Chasing Long-Term JGB Rally, but Not Super-Long End

Research evidence excerpt

Chasing Long-Term JGB Rally, but Not Super-Long End

IdeaMgovernment on June 24 held a joint meeting (only Japanese slide is available as of writing)

of the Council on Economic and Fiscal Policy and Council for Japan’s Growth Strategy, and

presented an overview of its plan calling for more than JPY370 trillion in public- and

private-sector investments.

The accompanying economic and fiscal simulation points to fiscal spending being

increased by JPY10 trillion from FY2027 with this figure projected to exceed JPY15 trillion

by FY2040 after adjustments for envisaged inflation and wage growth.

It does, however, need to be recognized that these numbers do not include promised

“strategic investments that enhance resilience against potential crises and investments

that promote growth”, which are to be managed under a separate special account allowing

for multi-year budgets and funded via issuance of so-called “bridging bonds”.

Moreover, as our economist suggested, the Cabinet Office’s analysis seemingly does not

make any allowance for the presumed two-year consumption tax cut for food or the

refundable tax credit scheme that is supposed to replace it (although the government

suggested that any financing needs related to a c-tax cut will not rely on deficit bonds

issuance).

The primary balance is projected to turn positive under the comparatively optimistic

scenario in which the government’s growth strategy proves reasonably successful in

stimulating private-sector capital investment, but the fiscal deficit (including interest

payments on debt) is meanwhile set to worsen under each of the three scenarios (see

Exhibit 3 ).

Exhibit 3: Cabinet Office projections of primary balance (PB) and the fiscal balance-to-GDP ratio (%; our

translation) under various economic scenarios