Primary Balance: Japan's Fiscal North Star
Understanding Japan's primary balance—the critical metric that determines fiscal sustainability
What is the Primary Balance?
The primary balance measures a simple question: Does Japan collect enough revenue to cover its current spending (social security, defense, public works, etc.), or does it need to borrow just to keep the lights on?
It excludes interest payments on past debt to isolate whether today’s government is living within its means.
Formula:
\[\begin{align} \text{Primary Balance} &= \text{Total Revenue} - (\text{Total Spending} - \text{Interest Payments}) \\ &= \text{Revenue} - \text{Primary Spending} \end{align}\]Why “primary”? The term refers to current fiscal effort (active spending/revenue decisions today), excluding interest payments which are predetermined by past deficits.
Why exclude interest payments?
We just emphasized in Section 2.3 that interest payments are massive (¥11-12T annually). So why separate them out?
Because interest payments can’t be controlled by today’s fiscal policy. They’re predetermined by past borrowing decisions and current market rates.
The primary balance isolates what current policy can actually control: Are we collecting enough revenue to cover current operations (salaries, defense, healthcare), or are we borrowing to fund the basics?
Why this matters: A primary deficit means current fiscal policy is unsustainable on its own terms—even ignoring past debt. A primary surplus means current operations are funded; the burden is inherited debt.
The three outcomes:
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Primary Surplus (Revenue > Primary Spending): The government is living within its means and can use the surplus to pay down debt or cover interest without new borrowing.
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Primary Balance (Revenue = Primary Spending): The government breaks even on operations but must borrow to cover interest payments.
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Primary Deficit (Revenue < Primary Spending): The government must borrow for both operations and interest—debt grows faster than GDP, creating a debt spiral risk.
Japan’s current state: Primary deficit of -¥4.5 trillion (-0.7% of GDP) (FY2025 projection)
Why Primary Balance is the Intermediate Target (中間目標)
While the primary balance is emphasized as a critical metric, it’s important to understand that it serves as an intermediate target (中間目標), not the ultimate goal itself. The ultimate goal (最終目標) is to stabilize and reduce the debt-to-GDP ratio.
The Debt Dynamics Equation:
\[\Delta \left(\frac{D}{GDP}\right) = \frac{r - g}{1 + g} \cdot \frac{D}{GDP} - \frac{PB}{GDP}\]Where:
- $\Delta \left(\frac{D}{GDP}\right)$ = Annual change in debt-to-GDP ratio
- $r$ = Real interest rate on government debt
- $g$ = Real GDP growth rate
- $D/GDP$ = Debt-to-GDP ratio
- $PB/GDP$ = Primary balance as % of GDP
This equation shows that four variables determine whether debt-to-GDP rises or falls: interest rates, growth, existing debt stock, and primary balance.
Why focus on primary balance? It’s chosen by process of elimination:
- Interest rates (r): Limited government control; BOJ independence and market discipline constrain artificial suppression
- Growth rate (g): Cannot be directly controlled through policy; depends on demographics, productivity, global conditions
- Existing debt (D/GDP): Cannot be changed quickly; it’s the outcome we’re trying to improve
- Primary balance (PB/GDP): Fully controllable through fiscal policy (tax rates and spending decisions)
The primary balance is the only variable the government can directly control through annual budget decisions. However, it’s worth noting that among the variables in the equation, the primary balance has a relatively modest impact compared to changes in interest rates or growth rates—but it remains the target because it’s the only lever policymakers can reliably pull.
FY2025: Japan’s Primary Balance Calculation
⚠️ Understanding Two Accounting Methods
Japan's fiscal position can be measured using two different accounting scopes:
- Central Government: MOF general account budget only
- General Government (SNA basis): Central + Local governments + Social Security funds
The official primary balance target uses the general government measure, which is internationally comparable and reported by Cabinet Office, IMF, and OECD.
Central Government Budget (Illustrative Calculation)
Total Revenue: ¥86.9 trillion
- Tax revenue: ¥78.4 trillion (record high, 6th consecutive year)
- Other revenue (asset sales, fees, etc.): ¥8.5 trillion
Total Spending: ¥115.5 trillion (record high, 2.6% increase from FY2024)
Debt Servicing Costs: ¥28.2 trillion (24.4% of total spending)
Primary Spending (Total Spending - Debt Servicing):
\[¥115.5T - ¥28.2T = ¥87.3 \text{ trillion}\]Central Government Primary Balance (Illustrative):
\[\text{Revenue} - \text{Primary Spending} = ¥86.9T - ¥87.3T = -¥0.4 \text{ trillion}\]Official General Government Primary Balance
Primary Balance (Cabinet Office, January 2025 projection):
\[\text{Primary Balance} = -¥4.5 \text{ trillion (deficit, -0.7% of GDP)}\]📌 Why the Difference?
The general government measure includes local governments and social security funds, which have their own revenues (e.g., social insurance premiums) and expenditures. The -¥4.5T general government deficit is larger because local government finances and social security accounts run deficits that are not captured in the central government budget alone. This is the internationally comparable measure used by IMF, OECD, and rating agencies.
What this means:
Even ignoring the ¥28.2 trillion debt servicing burden, Japan’s general government is running a ¥4.5 trillion operating deficit. At the central government level, new bond issuance for FY2025 is ¥28.6 trillion, which funds:
- The operating deficit (primary deficit)
- Debt servicing costs (interest payments + debt redemption fund contributions)
FY2025 New Bond Issuance: ¥28.6 trillion
- Special Deficit-Financing Bonds: ¥21.9 trillion
- Construction Bonds: ¥6.8 trillion
This represents 24.8% of the ¥115.5T budget funded by debt—even after record-high tax revenue of ¥78.4T.