Takaichi Announces a Supplemental Budget

Prime Minister Sanae Takaichi announced that she would consider formulating a FY2026 supplemental budget for coming summer in a meeting of leaders of leading coalition on May 18th. Although she has been reluctant to having a supplemental budget, Takaichi is turning around, facing economic difficulty stemming from prolonged war in Iran or other international relations. Concerning possible mobilization of governmental spendings, interest rate of long-term bond showed steep hike which implied decline of bond values.

No supplemental budget has been Takaichi’s one of the pillars for her economic policy titled “responsible and proactive public finances.” “We will make a clean break from our current budget formulation process in which it is assumed that a supplementary budget will be compiled each fiscal year,” said Takaichi in her policy speech at the beginning of current session of the Diet in February.

 

Takaichi’s budget reform plan was aimed at enhancing predictability of national budget, based on the notion that economic growth needs mobilization of national budget. “In this era when the world is engaged in intense competition over industrial policy, Japan should not hesitate to carry out the fiscal outlays necessary to realize economic growth,” Takaichi said in the speech to the Diet. Takaichi believes that fiscal spendings across multiple fiscal years will enable the businesses to engage in research and development and encourage capital investments with confidence.

 

Three months after her speech, Takaichi had to change the course. Takaichi delivered subsidy for families’ energy payment on electric power and gas between January and March. When the United States and Israel attacked Iran in February, which caused increase of oil price with blockade in the Strait of Hormuz, Takaichi administration immediately introduced another subsidy for gasoline to cap its price at 170 yen per litter. With the war in Iran does not show an end state, Takaichi now faces necessity of continuing government’s support for people’s payment in crucially hot summer.

 

To catch up people’s demand for the summer, the supplemental budget needs to pass the budget within current session of the Diet, which will close on July 17th. Current subsidy for gasoline was appropriated by governmental funds. But the funds are going to dry up. Takaichi is looking for another budgetary resource for the subsidy. It is supposed that Takaichi is going to issue governmental bonds for her supplemental budget.

 

Takaichi’s announcement on supplemental budget caused immediate interest hike of long-term bonds. It rose to 2.8 percent, marking the highest record in these 29 years on May 18th. Value of Japanese yen dropped to 159 yen against U.S. dollar and Nikkei 225 temporarily sudden decline by 1 thousand yen. It was a phenomenon of triple lows.

 

When Takaichi delivered a supplemental budget last November, triple lows also appeared. At the time when Takaichi took the seat of prime minister last October, interest rate of long-term bonds was around 1.6 percent. But it exceeded 2 percent in December and kept on rising. It shows market’s skepticisms on Takaichi’s economic policy based on fiscal mobilization, in which fiscal discipline can be left behind.

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