Fitch eyes Japan budget for balance between growth and fiscal discipline

TOKYO: Fitch Ratings will scrutinise Japan’s budget for the next fiscal year for clues on whether Prime Minister Sanae Takaichi can balance her growth-focused spending agenda with fiscal discipline, a senior analyst said.

“We need to look at the composition of the final budget proposal to see the balance between the ‘responsible’ and the ‘proactive’ aspects of the Takaichi administration’s fiscal policy,” Jeremy Zook, senior director of Asia-Pacific sovereign ratings at Fitch, said in an interview with Reuters.

Japan’s budget requests for the next fiscal year have ballooned to a record, due partly to a new budgeting framework that integrates initial and supplementary budget spending, as well as higher government borrowing costs driven by Takaichi’s expansionary fiscal agenda.

“What we’ll be watching quite closely is where the primary balance goes … having that firm assessment on the primary balance will really tell us where the fiscal policy direction is going,” Zook said.

The primary balance, which excludes debt-servicing costs, is a key measure of whether government revenues can cover spending without adding to debt.

Fitch currently expects Japan’s debt-to-GDP ratio to continue falling for the next five years, supported by stronger nominal growth and tax revenues despite a more expansionary fiscal policy stance, before stabilising thereafter.

But much may depend on the success of Takaichi’s investment programme, which seeks to boost Japan’s growth potential through public and private sector investment in strategic industries, he said.

Zook said governments around the world were increasingly using fiscal policy to support investment and growth, although industrial policies have produced mixed results historically.

“Allowing the private sector to take the lead in determining where these investment flows should go will probably be the most conducive to having this policy be successful,” he said.

Fitch is still assessing the programme and whether the government’s 17 priority investment areas would benefit from greater focus, he added.

Fitch in January reaffirmed its rating for Japanese sovereign credit at A, five notches below the top AAA rating, with a stable outlook.

The rating is one notch below S&P’s A+ and Moody’s A1 rating on Japan.

“Neither upside nor downside is more likely,” Zook said on the rating.

“The risks are balanced.”