Japan Economic Notes

Research evidence excerpt

Japan Economic Notes

3 July 2026

majority can be formed. The ruling coalition does not have enough Upper House

seats to pass legislation on its own, so it is essential not only to suppress cautious

voices within the LDP but to build a consensus with opposition parties. The markets

are looking beyond simply whether the tax reductions will be implemented and to

the government’s governance capabilities, i.e., its ability to advance its entire policy

package smoothly, including the basic policy guidelines, tax reform, and a new

growth strategy. The government is considering submission of a bill to an

extraordinary Diet session this autumn, but we may reasonably assume that the risk

of prolonged political adjustments is growing. Given this situation, concerns are rife

in financial markets, especially JGB markets, regarding the uncertainty over fiscal

policy, leaving little incentive to buy JGBs actively. It is difficult even for economists

to incorporate future fiscal policy into their forecasts based solely on the

information available at this time.

The draft of the basic policy guidelines says as one of its key principles that the

government must “secure market confidence through stronger communication”

and use multiple indicators for multifaceted analysis and review. However, we wish

to point out two important points that are not listed in the guidelines.

First, fiscal discipline as viewed in the markets includes not only hard data like fiscal

deficits and government debt but the policy-making process itself. If the ruling

coalition, which holds a super majority of over two-thirds of the seats in the Lower

House, were to conduct policy without regard to consensus building in the Upper

House, it could not hope to gain the confidence of financial markets over fiscal