Thick-boned Plan Leaves Fiscal Discipline Behind

Sanae Takaichi Cabinet officially authorized Basic Policy on Economic and Fiscal Management and Reform (Thick-boned Plan) 2026 on July 21st. Following Takaichi’s firm conviction for building a strong economy, the plan focuses on active investment on businesses, leaving fiscal discipline behind. It is not clear, however, whether the markets will place fundamental trust in this economic policy of Takaichi government. 

The plan is annual guideline of the Cabinet for important economic policies and formulation of annual budget. Former prime minister, Jun-ichiro Koizumi, started publishing the plan in 2001, which was discussed in Council on Economic and Fiscal Policy. The plan has been directing economic policy of every administration, reflecting basic idea of the prime minister.

 

Since she took office last October, Prime Minister Takaichi has been insisting on promoting investment for crisis management and growth. Takaichi recognizes that a longtime slowdown of Japanese economy is brought by lack of investment. To get rid of the slump, she strongly believes that Japanese economy needs a bold investment backed by the national government. To implement it, she promotes reform of fiscal system and enable governmental spendings to go beyond the frame of annual budget. She reiterates that the reform will give businesses a predictability.

 

The Thick-boned Plan introduces new framework of subsidy without limitation. The government encourages investment of 370 trillion yen on strategic businesses through fiscal year 2027 to 2040. Takaichi government simultaneously approved Japan’s Growth Strategy which encourages investment on economic security, energy security or cyber security.

 

To promote active investment, the plan excluded the words of “fiscal consolidation” for the first time. “We will remain committed to achieving both economic revival and fiscal consolidation,” said the Thick-boned Plan 2025. This phrase was replaced by “We will achieve strong economy and fiscal sustainability at the same time” in 2026 plan. Although previous governments upheld primary balance as the indicator of economic healthiness, Takaichi uses ratio of debt against gross domestic products (GDP). In this context, huge amount of debt does not matter so much as long as GDP is growing.

 

Since economic policy of Takaichi does not explain how to financially endorse it, it is inevitable that markets cast skeptical eyes on the government. As Takaichi government accumulateed discussion for the Thick-boned Plan, Japanese yen depreciated against U.S. dollar and long-term interest rose to the highest level in these three decades. This phenomenon was named “Thick-boned Shock.”

 

Seeking communication with the markets, the plan introduced a sentence for maintaining confidence on the government. The plan quoted Article 3 of Bank of Japan Act, which says “The Bank of Japan’s autonomy regarding currency and monetary control must be respected.” The government tried to remove concern of Takaichi’s excessive intervention in monetary policy.

 

However, the markets showed sober response. Japanese yen marked 163 yen per U.S. dollar on the day the Thick-boned Plan was released. It was the lowest value of Japanese yen in these 39 years. Takaichi government has not established good communication with the markets.

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