• Kyodo

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Japan may be able to restore its public finances in fiscal 2026, a year earlier than the previous estimate made in July, with tax revenue expected to increase as businesses recover from the impact of the coronavirus pandemic, the government said Friday.

The nation’s primary balance — tax revenue minus expenses other than debt-servicing costs — is expected to turn black in the year through March 2027 with a surplus of about ¥200 billion ($1.8 billion) under the most optimistic scenario, the Cabinet Office said in its biannual projection.

According to the latest projection, the world’s third-largest economy would still miss its goal of achieving fiscal consolidation in fiscal 2025, which was delayed in 2018 by five years from fiscal 2020 under former Prime Minister Shinzo Abe’s administration.

Japan has been struggling to improve its fiscal health amid snowballing social security costs stemming from its rapidly graying of the population and outlays to tackle the coronavirus pandemic.

But the office said reaching the fiscal 2025 target could “come into sight” if the country streamlines expenditure. Prime Minister Fumio Kishida also said the government will stick to the fiscal 2025 goal.

“We confirmed that the country is not in a situation that requires a change in the target fiscal year,” he said at a meeting of a key economic and fiscal policy panel at which the Cabinet Office’s estimate was presented.

Kishida’s comments followed a review by the government of the fiscal 2025 goal in light of the pandemic’s impact on Japan’s economy and finances.

The bringing forward of the timeline was mainly due to envisaged increases in tax income, which is expected to continue growing gradually on the back of rising corporate tax revenues amid a recovery by manufacturers and IT-related companies, according to the office’s medium- to long-term estimates.

In fiscal 2022, the government expects record-high tax revenue of ¥65.24 trillion, up ¥6 trillion from its forecast last July.

However, the estimate is based on the rosiest scenario, under which Japan’s economy continues to grow around 2% in real terms and around 3% in nominal terms from fiscal 2022 onward.

As the economy achieved more than 3% nominal growth only once in the two decades through fiscal 2020, it will likely be a challenge for the country to realize fiscal consolidation in fiscal 2026 as projected.

If the economy records real and nominal growth of only around 1%, the country will be unable to achieve fiscal soundness by fiscal 2031, the furthest period covered by the latest estimate.

Gross domestic product contracted a real 4.5%, or a nominal 3.9%, in fiscal 2020, with a primary balance deficit of ¥48.8 trillion, swollen by three supplementary budgets to tackle the pandemic.

The office warned of uncertainties regarding the economic outlook that should be carefully watched, such as the impact of the global surge in coronavirus infections following the spread of the omicron variant.

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