Fitch eyes Japan budget for balance between growth and fiscal discipline

TOKYO: Fitch Ratings will closely examine Japan's budget for the upcoming fiscal year to assess whether Prime Minister Sanae Takaichi can strike a balance between growth-oriented spending and fiscal responsibility, according to a senior analyst. Jeremy Zook, Fitch's senior director of Asia-Pacific sovereign ratings, stated, "We need to analyze the budget proposal's composition to gauge the balance between the 'responsible' and 'proactive' elements of Takaichi's fiscal policy."

Japan's budget for the next fiscal year has reached a record high, largely due to a new budgeting framework that combines initial and supplementary budget spending, as well as rising government borrowing costs stemming from Takaichi's expansionary fiscal approach. The analyst emphasized the importance of monitoring the primary balance, which excludes debt-servicing costs, as it indicates whether government revenues can fund spending without increasing debt.

Fitch anticipates Japan's debt-to-GDP ratio to decline over the next five years, driven by robust nominal growth and tax revenues, even with a more expansionary fiscal policy. However, the success of Takaichi's investment program, aimed at enhancing Japan's growth potential via public and private sector investment in key industries, will heavily influence the outcome.

Fitch is still evaluating the programme and whether the government's 17 priority investment areas should receive more emphasis. The rating agency reaffirmed Japan's sovereign credit rating at A, a notch below the top AAA rating, with a stable outlook in January. Zook noted that the risks to the rating are balanced, with neither upside nor downside appearing more probable.