Japan Government Reaffirms Budget Goal Amid Economic Reforms and Chip Production Focus

Key Takeaway

• Japan reaffirms its goal of achieving a primary balance surplus next fiscal year, driven by record tax receipts and economic reforms.
• The Bank of Japan's policy shift, including the first interest rate hike since 2007, aims to link wage gains with demand-led price increases.
• Government prioritizes economic security and semiconductor production, allocating up to ¥920 billion ($5.8 billion) for Rapidus Corp.'s 2-nanometer chip project.

Government Reaffirms Budget Goal

Japan's government has reiterated its commitment to achieving a primary balance surplus in the next fiscal year, as outlined in a draft of its economic and fiscal policy plan released on Tuesday. This marks the first explicit mention of the budget goal in the annual policy guidelines since 2021, highlighting the increased likelihood of achieving it amid rising interest rates. Prime Minister Fumio Kishida emphasized the plan's aim to foster a sustainable economy through comprehensive reforms. "We aim to achieve a sustainable economy through economic, fiscal and social security reforms that ensures people can feel wealth and happiness," Kishida stated.

Record tax receipts, driven by inflation and a weak yen, have provided an unexpected financial boost, putting the government on track to reach a surplus. However, the plan also indicates that maintaining a primary balance surplus in the 2030s may be challenging, especially under a baseline scenario with real annual economic growth of around 0.5%. The Cabinet is expected to approve the policy vision later this month.

Economic and Financial Shifts

The policy blueprint reflects changing perceptions about Japan's economic and financial conditions following the Bank of Japan's (BOJ) termination of its massive monetary easing program in March, which included the first interest rate hike since 2007. The draft plan notes that "monetary policy has entered a new phase," and expresses optimism that the BOJ will achieve a virtuous cycle linking wage gains to demand-led price increases, aligning with its 2% stable inflation target.

Prime Minister Kishida underscored the necessity of sustained wage growth to propel the economy into a new phase by 2030. The draft also highlights challenges such as rising debt-servicing costs amid the transition to a higher interest rate environment. Japan's 10-year yield currently stands above 1%, having breached this threshold for the first time in over a decade last month.

Focus on Economic Security and Chip Production

In addition to fiscal goals, the government is prioritizing economic security, particularly in the semiconductor sector. Legislative measures are being considered to support the mass production of next-generation semiconductors, with plans to expand loans and investments to strengthen supply chains. The industry ministry is already backing Rapidus Corp., which aims to mass-produce 2-nanometer logic chips by 2027 in northern Hokkaido. The government has allocated up to ¥920 billion ($5.8 billion) for this venture, although Rapidus has so far secured only ¥7.3 billion from major Japanese companies, including Toyota Motor Corp. The ministry indicated that providing government loan guarantees could be an option to further support Rapidus.

Management Quotes

• Fumio Kishida, Prime Minister of Japan:

  "We aim to achieve a sustainable economy through economic, fiscal and social security reforms that ensures people can feel wealth and happiness."
  "Monetary policy has entered a new phase."
  "Concerns over rising debt-servicing costs amid the transition to an environment with interest rates."