Fitch eyes Japan budget for growth vs. fiscal discipline balance

Fitch Ratings plans to closely examine Japan's budget for the upcoming fiscal year to assess whether Prime Minister Sanae Takaichi can successfully integrate her growth-oriented spending plans with fiscal prudence. Jeremy Zook, a senior director at Fitch, stated that the agency will look at the composition of the final budget proposal to understand the balance between "responsible" and "proactive" fiscal policies.

Japan's budget requests have reached a record high, influenced by a new budgeting framework and increased borrowing costs stemming from Takaichi's expansionary fiscal approach. Zook highlighted that Fitch will be closely monitoring the primary balance, which excludes debt-servicing costs, as a key indicator of the government's fiscal direction. The primary balance indicates whether government revenues can cover expenditures without increasing debt.

Fitch currently forecasts Japan's debt-to-GDP ratio to decline over the next five years, supported by stronger nominal growth and tax revenues, even with a more expansionary fiscal policy. The ratio is expected to stabilize thereafter. The success of Takaichi's investment program, aimed at enhancing Japan's growth potential through public and private investment in strategic sectors, will be crucial. Zook noted that while governments globally are using fiscal policy for investment and growth, industrial policies have historically yielded mixed results, suggesting that private sector leadership in investment flows would be most conducive to success.

Fitch is still evaluating the program and whether the government's 17 priority investment areas would benefit from increased focus. In January, Fitch reaffirmed Japan's sovereign credit rating at 'A' with a stable outlook, five notches below the top 'AAA' rating. This rating is one notch below S&P's 'A+' and Moody's 'A1'. Zook indicated that the risks to Japan's rating are balanced, with neither upside nor downside being more likely.