Fitch Eyes Japan Budget for Fiscal Discipline

Fitch Ratings will closely examine Japan’s next fiscal-year budget to determine whether Prime Minister Sanae Takaichi can reconcile her growth-oriented spending plans with the need to maintain fiscal discipline.

Jeremy Zook, senior director of Asia-Pacific sovereign ratings at Fitch, said the agency will focus on the final budget’s composition and how it reflects the government’s commitment to both “responsible” and “proactive” fiscal policy.

Japan’s budget requests have climbed to a record high, partly because of a new framework combining initial and supplementary spending. Rising government borrowing costs have also increased fiscal pressure as the Takaichi administration pursues a more expansionary economic strategy.

A key indicator for Fitch will be Japan’s primary balance, which measures whether government revenue can cover expenditures excluding debt-servicing costs. Zook said a clearer assessment of the primary balance should provide important insight into the direction of Japan’s fiscal policy.

Fitch currently forecasts Japan’s debt-to-GDP ratio will decline over the next five years, supported by stronger nominal economic growth and higher tax revenue despite increased government spending. The ratio is expected to stabilize after that period.

However, Japan’s longer-term fiscal outlook could depend partly on the effectiveness of Takaichi’s investment strategy. The government aims to strengthen economic growth through public and private investment across 17 strategic priority areas.

Zook said greater private-sector involvement in deciding where investment capital should flow could improve the programme’s chances of success. Fitch is still evaluating the initiative and whether concentrating resources on fewer priority sectors could produce stronger results.

Governments worldwide have increasingly turned to fiscal policy and industrial investment to stimulate economic growth, although Zook noted that such strategies have historically delivered mixed outcomes.

Fitch reaffirmed Japan’s sovereign credit rating at A with a stable outlook in January. The rating remains five notches below AAA and one notch below Japan’s ratings from S&P and Moody’s.

For now, Fitch sees Japan’s sovereign credit risks as evenly balanced, with Zook saying neither a rating upgrade nor downgrade is currently more likely.