Japan Deletes Fiscal Consolidation Target from Official Documents, Pushes Further Borrowing to Spur Domestic Investment

This document, which had included the goal of a primary balance surplus, or 'basic fiscal balance surplus,' since the Koizumi administration in 2001 under the 'Honebuto Policy,' had explicitly stated this target. The deletion is interpreted as a strong signal of removing restrictions on issuing new government bonds.

This raised concerns that it could further fuel yen weakness. Japan recently announced a consumption tax cut on food and a large public-private investment plan without clearly specifying how they would be funded, which has intensified debate over spending expansion.

The expansionary-fiscal faction diagnoses Japan's current situation as close to deflation. Their analysis is that it is not stagflation, where prices rise while wages stagnate, but rather a persistent state of 'excess saving' in which companies do not invest and households cut spending due to uncertainty about the future. They argue that even if the government issues bonds to supply money to the market, inflation will not follow unless investment and consumption are activated in the private sector.

Therefore, the expansionary-fiscal faction's position is that the government should break free from excessive obsession with fiscal soundness and actively expand spending to induce private investment. Against this background, despite criticism of 'fiscal spending without securing funds,' the government took the bold step of deleting the fiscal consolidation target.

In the past, after the bubble burst, Japan became entrenched in a pattern where companies increased savings instead of investing, and households cut spending due to future anxiety. The core logic of the expansionary-fiscal faction is that the government, obsessed with fiscal consolidation, cut spending, which further deepened the downturn. They stress that to escape the 'lost 30 years,' the government must first pour in the seed money to lead economic revitalization.

After the bubble burst, Japanese companies shifted their structure toward increasing savings rather than making large-scale investments. This pushed corporate net funding demand close to zero, and as private-sector investment stagnated over the long term, it became a factor hindering economic growth.

This phenomenon is widely recognized across Japanese academia. The analysis holds that as companies cut investment and increased savings, the economy contracted, and when the government also focused on fiscal consolidation and reduced spending, the downturn became further entrenched. The expansionary-fiscal faction argues that to break this vicious cycle, the government must induce investment through active fiscal policy.

The government emphasized deregulation and market autonomy and pushed policies to minimize government intervention. This was also one of the core tenets of Abenomics. Abenomics aimed to promote economic growth by facilitating corporate activity through deregulation, but it tended to rely more on monetary policy than on expanding fiscal spending.

The expansionary-fiscal faction criticizes this 'small government' philosophy as having deepened Japan's long-term stagnation. With companies avoiding investment, the government also cut spending, sapping economic vitality. They argue that the government must actively take the lead as a catalyst for the economy and stress that the existing fiscal policy direction must change.

Abenomics and the current Takaichi Sanae cabinet's expansionary fiscal policy (Sanaenomics) share the goal of economic revitalization but differ in approach. Abenomics focused on monetary easing, in which the central bank purchased government bonds from commercial banks through quantitative easing to supply liquidity. However, this did not lead to companies borrowing to expand investment, because after the bubble burst, companies had already strongly preferred saving over investing.

Sanaenomics, by contrast, emphasizes direct government fiscal spending. In a situation where companies do not borrow to invest, the government intends to step in directly to expand public investment and induce private-sector investment. This reflects a recognition of Abenomics' limits and a change that places greater importance on the role of fiscal policy. In short, while Abenomics was a method of 'releasing money but leaving it to the market to decide who spends it,' Sanaenomics takes an active approach of 'the government itself spending money to move the economy.'

The primary balance (PB) refers to the difference between current revenue, excluding government bond issuance from total government revenue, and current expenditure, excluding interest payments on government bonds from total government spending. This indicator shows how much of government fiscal activity is covered by tax revenue alone.

Few countries worldwide other than Japan make a PB surplus target the core goal of national finances. Major economies such as the United States and China do not feel bound by a PB surplus target even though their fiscal conditions are worse than Japan's. The expansionary-fiscal faction argues that Japan's excessive fixation on this target unnecessarily highlighted fiscal soundness concerns and, as a result, weakened the government's active economic stimulus measures.

They emphasize that the PB surplus target is an obsessive mindset unique to Japan, a kind of 'Galapagos-ization,' which needlessly contracted fiscal policy and held back economic growth. Therefore, the core logic of the expansionary-fiscal faction is that Japan's economy must be freed from unnecessary constraints by deleting this irrational target. This can be seen as an attempt to reform the very mindset that weighed down Japan's economy during the 'lost 30 years.'

In conclusion, the expansionary-fiscal faction argues that Japan must break free from the fiscal soundness obsession it created itself. Their analysis is that the unique fiscal target, which does not match global standards, caused Japan to miss growth opportunities. They expect that deleting the PB surplus target will become an occasion to inject new vitality into Japan's economy.

They view yen depreciation as positive for export competitiveness and for stimulating inflation expectations, thereby helping Japan escape deflation.

They do not oppose interest rate hikes outright. The expansionary-fiscal faction agrees with 'gradual rate hikes' but stresses that timing and pace are what matter. They argue that rate hikes should be carried out only after corporate facility investment as a share of GDP rises sufficiently from the current 18% to above 20%. The logic is that rate hikes can take effect without burdening the economy only after sufficient corporate investment has strengthened the economy's underlying fundamentals.

This argument reflects concern that rate hikes could hold back economic recovery and shows the faction's stance of prioritizing economic growth through fiscal expansion. In other words, rate hike decisions should be made carefully, depending on indicators that gauge the degree of economic recovery.

The Bank of Japan's attempts to defend against yen weakness have so far had little effect. Despite verbal intervention by Governor Ueda and limited moves toward rate hikes, the dollar-yen exchange rate often moves in unexpected ways. In the past, Japan intervened in the currency market in even-numbered years, but the effect did not last even a month.

This is because the 'ammunition' the Bank of Japan can deploy to defend the exchange rate, namely its foreign exchange reserves, is already widely known and limited in size. Market participants accurately grasp the scope and limits of intervention based on the Bank of Japan's foreign reserves, so the analysis is that its intervention will have only short-term effects and will struggle to change the long-term trend.

In the past, funds tended to flow into the yen during global crises, but in recent crises such as the COVID-19 pandemic, the Russia-Ukraine war, and Middle East instability, capital concentrated in the dollar more prominently.

They interpret this change as showing that the yen no longer fully enjoys its status as a safe asset. The expansionary-fiscal faction's view is therefore that the current yen weakness should be seen as a process in which the past abnormal yen strength is being resolved and the exchange rate adjusts according to the market's fundamental value. This is regarded as an essential process for Japan's long-term structural improvement.

This is because its foreign exchange reserves, the 'ammunition' that could support the yen by intervening in the currency market, particularly dollar assets, are insufficient. Since its foreign exchange reserves are already exposed to the market, it is widely known that its room for intervention is limited.

In this situation, it is hard for Japan to defend against yen weakness on its own. Experts analyze that without cooperation from allies with abundant dollar assets or joint intervention, the Bank of Japan will struggle to reverse the trend of yen weakness.

In a survey, Japanese respondents said they felt an average price increase of 17.3%. This is very high compared with the official Japanese inflation rate, which remains in the 1% range.

This gap is mainly attributed to sensitivity to rising prices of essentials such as food. Ordinary households are hit harder by price changes in goods that make up a large share of their spending, so perceived prices can feel high even when the overall price index is low. This is pointed out as something the government must take into account when pushing active fiscal policy.

Recently, positive signals have also appeared in the Japanese economy. In 2026, Japan's real wages turned positive for the first time in 40 months. Given that real wages had turned positive for only 6 months in the preceding 40 months, this represents a significant change for the Japanese economy.

The turn to positive real wages means wage increases are keeping pace with rising prices, which can contribute to a recovery in households' purchasing power and to revitalized consumption. This can be read as an indicator that the expansionary-fiscal faction's claim of 'economic revitalization through fiscal spending' is gradually bearing fruit. It can also be seen as a result of the government's and central bank's efforts to escape deflation.

Rising real wages can increase household income, lead to stronger consumption, and in turn create a virtuous cycle in which corporate sales and investment expand. However, whether this trend will continue remains to be seen, as it is still early after a long 40-month slump.

This turn in real wages is evaluated as an important indicator that Japan's economy may be moving out of long-term deflation and into a normal economic cycle in which inflation and wage increases occur together. It is expected to raise positive expectations across the Japanese economy.

This evasion suggests that the debate over the size and nature of the Japanese government's financial assets is still ongoing. Since the size of government financial assets is an important factor in assessing the actual level of national debt, the lack of a clear explanation on this point is open to criticism.

The fiscal situations of Korea and Japan differ greatly, not only in the size of government debt but also in the international standing of their currencies. Even when considering the National Pension Service fund, Korea's net government debt may look relatively small, but this cannot be applied to Japan in the same way. Professor Lee Chang-min pointed out that while the yen is widely used in international markets as a 'quasi-reserve currency,' the won is merely a 'local currency.'

This difference in currency status has a decisive effect on how far and how a country can increase debt. Because of the yen's international credibility, Japan's market burden on government bonds issued in its own currency is relatively light. In other words, there is considerable room for the central bank to supply liquidity by purchasing government bonds when needed. The won, by contrast, is used only to a limited extent in international markets, so excessive debt growth carries greater risks of exchange rate instability and a decline in external credibility. The professor's analysis is therefore that Korea faces constraints on boosting the economy by increasing debt aggressively as Japan has done.

Their view is that Japanese capital that has flowed overseas should be used to revitalize domestic industry and create jobs.

In the past, Japanese banks tended to invest in overseas bonds and companies due to a preference for safe assets. The expansionary-fiscal faction, however, stresses that only by reinvesting this capital in Japan's domestic economy can long-term growth drivers be secured. They therefore urge banks to play a 'catalyst' role in supporting the growth and development of domestic industry, rather than merely increasing their assets.

Within and outside Japan, there is also a negative view of the expansionary-fiscal faction's argument. Critics say that the current improvement in bank earnings is merely a 'interest-income business' driven by rising rates, no different from the situation in 1989, when banks grew excessively bloated after rising to the top of market capitalization rankings during the bubble economy. At that time, six of the top ten companies by market capitalization in Japan were banks, and five banks were included in the global top ten, a sign that the financial sector's weight was abnormally high. Because of this past trauma, some have expressed concern about expanding the role of banks.

Skeptics warn that if banks focus on short-term financial returns rather than contributing to investment in the real economy, they may not lead to genuine industrial development and could instead trigger another financial bubble. In other words, this view holds that the current change could lead to overheating in the financial sector rather than a genuine improvement in the economy's structure.

Japan pledged to invest $550 billion in the U.S.; at the time of the July agreement last year, the amount was 80 trillion yen, but due to yen weakness it has now surged to 90 trillion yen. The three megabanks, faced with a suddenly larger investment burden and difficulties raising dollars, tried to halt lending, which set off alarm bells at Japan's Ministry of Finance. Japan's investment in the U.S. was on the verge of stalling.

An analysis suggests this situation may be connected to the U.S. midterm elections. Because the U.S. considers Japan's investment in America very important, it is argued that the U.S. may have intervened to some degree to stabilize the exchange rate so that Japan's investment could proceed smoothly. In other words, one argument America could have used is that 'the exchange rate must be stable to some extent for investment in the U.S. to proceed.' This is because excessive yen weakness would raise the investment burden on Japanese companies and could cause their investment in the U.S. to shrink.

He analyzed that the recent rate hikes in the United States were possible only because large-scale domestic investment had come first. In Korea's case as well, he stressed the positive impact of domestic investment on the economy, noting that SK Hynix's announcement that it would build a factory in Yongin with funds raised through its Nasdaq listing contributes to exchange rate stability.

The professor argued that, in the current situation where global supply chains are not functioning properly, domestic investment that secures each country's own supply capacity is key. He pointed out that even when domestic investment is difficult, it is important to build supply chains with trustworthy allies. He noted that the U.S. and Japan are moving in this direction, and that even though Korea may have to take part in U.S. investment, it is time to think about expanding domestic investment as the ultimate goal.

In conclusion, Professor Lee Chang-min emphasized through Japan's example that domestic investment is the core driver of economic growth, and that it can have positive effects in many areas such as exchange rate stability and supply chain restructuring. He suggested that government fiscal policy should move in a direction that promotes such domestic investment.