Chapter 2 2.8

International Assessment of Japan's Fiscal Position

How the world views Japan's primary balance deficit—G7 comparisons, policy debates, and IMF/OECD assessments

International Comparison: Japan as an Outlier

Japan’s persistent primary balance deficit stands out among G7 nations. Most developed countries achieved surpluses or balanced budgets in the 2010s.

G7 Primary Balance (2023, % of GDP)

Country Primary Balance Status
Canada +0.8% Surplus
Germany -0.3% Near balance
United Kingdom -2.1% Deficit
France -3.2% Deficit
United States -3.8% Deficit
Italy -1.2% Deficit (improved from -6% in 2020)
Japan -1.6% Persistent deficit

Note: 2023 data. Japan’s FY2025 primary deficit projected at -0.7% of GDP (Cabinet Office, January 2025), showing improvement but still in deficit.

Why Japan’s Deficit Is More Concerning

  1. Duration: Japan has run deficits for 27 of the last 30 years. Other G7 countries achieved surpluses in the 2000s or 2010s.

  2. Debt level: With 264% debt-to-GDP, Japan has no buffer. The US (123% debt/GDP) can run deficits; Japan cannot without risking sustainability.

  3. Aging demographics: Japan’s working-age population is shrinking faster than other G7 nations, making primary surplus harder to achieve.

  4. Deflation legacy: 20+ years of deflation mean tax revenue grows slower than other countries, even with similar economic growth.

How Other Countries View Primary Balance

  • IMF: Requires primary surplus for debt sustainability when debt > 100% of GDP
  • EU Fiscal Compact: Member states must achieve primary surplus or near-balance
  • Rating agencies (Moody’s, S&P, Fitch): Primary deficit is a red flag for countries with high debt

Japan’s credit rating (A+ to Aa3 range) reflects concern over the persistent primary deficit. Only BOJ intervention and domestic ownership prevent a ratings downgrade.

The Policy Debate: How Japan Views Primary Balance

The primary balance has become a political battleground in Japan, dividing policymakers, economists, and the public.

Fiscal Hawks (Consolidation Advocates)

Proponents: MOF bureaucrats, IMF, OECD, traditional economists

Argument:

  • Japan must achieve primary surplus to stabilize debt-to-GDP ratio
  • Current deficit path is unsustainable—interest rates will continue to rise
  • Aging society means spending will only increase; revenue cannot keep pace
  • Need spending cuts (social security reform) and/or tax hikes (consumption tax to 15%+)

Evidence:

  • Koizumi era (2002-2008) proves surplus is achievable with political will
  • Greece and Italy show what happens when markets lose confidence
  • BOJ cannot keep rates at zero forever—normalization will explode interest costs

Fiscal Doves (MMT-Influenced / Growth-First)

Modern Monetary Theory (MMT) argues that countries issuing their own currency (like Japan with the yen) cannot run out of money—they can always print more. The only constraint is inflation, not solvency or debt levels.

Proponents: Some LDP politicians, BOJ pragmatists, heterodox economists

Argument:

  • Primary balance is not urgent while BOJ controls yields and inflation is stable
  • Japan issues debt in yen, owns most debt domestically—no solvency risk
  • Austerity (spending cuts/tax hikes) will crush growth, worsening the deficit
  • Focus on nominal GDP growth first; fiscal consolidation can wait

Evidence:

  • Japan has run deficits for 30 years without crisis—markets still trust JGBs
  • BOJ holds 50% of debt—effectively monetized
  • 2014 and 2019 consumption tax hikes caused recessions, proving austerity backfires

Current Government Position (2025)

The Ishiba administration (October 2024-present) has rhetorically committed to primary surplus by 2026, but actions suggest growth-first approach:

  • ¥13.9 trillion economic stimulus package (October 2024) that reversed July’s surplus projection within 3 months
  • Defense spending increases (2% of GDP target, ¥8.7T in FY2025, up 9.5%)
  • Childcare spending expansion (¥3.6 trillion annually)
  • Cost-of-living support packages
  • No immediate plans for consumption tax hike

Reality: The FY2025 primary surplus target was formally abandoned within 6 months of being projected (July 2024 → January 2025). Japan talks about fiscal consolidation but prioritizes economic growth and political stability. The primary balance target remains a signaling mechanism to reassure markets and rating agencies, not a binding constraint on policy.

International Perspectives (2025)

The international community continues to closely monitor Japan’s fiscal situation, with major multilateral organizations providing updated assessments in 2025.

IMF Assessment (April 2025 Article IV Consultation)

Key Findings:

  • Primary deficit outlook: Fiscal deficit projected to continue rising over medium term, estimated at 2.5% of GDP in 2024, increasing slightly in 2025
  • Debt trajectory: Public debt expected to decline until 2029, then rise to 233.5% of GDP by 2033 driven by:
    • Growing primary deficit
    • Rising real interest rates as BOJ normalizes policy
    • Aging-related spending on health and long-term care
  • Debt servicing costs: Expected to double by 2030 as interest rates normalize from ultra-low levels
  • Sustainability risk: Despite economic recovery, primary deficit remains high and unlikely to meet balance target

IMF Recommendations:

  • Develop clear plan to offset rising interest costs and aging-related expenditure pressures
  • Fiscal consolidation necessary to ensure debt sustainability
  • Increase fiscal space to respond to economic shocks (earthquakes, natural disasters)
  • Implement robust debt management strategy given large debt stock

OECD Assessment (June 2025 Economic Outlook)

Key Findings:

  • Gross public debt: 243% of GDP in 2024, projected to decline slightly to 242% in 2025
  • Primary deficit projection:
    • 2024: -1.5% of GDP
    • 2025: Slightly expansionary fiscal stance (Ishiba stimulus)
    • 2026: -0.6% of GDP (assuming no supplementary budgets and fiscal consolidation)
  • Fiscal stance: Projected to be slightly expansionary in 2025 before tightening in 2026
  • Challenge: Primary balance set to remain negative throughout projection period

OECD Recommendations:

  • Spell out and adhere to medium-term fiscal consolidation path with concrete measures
  • Gradually increase consumption (value-added) tax—current rate among lowest in OECD
  • Implement healthcare reforms to contain spending growth
  • Address fiscal sustainability amid rising debt servicing costs

ASEAN+3 Macroeconomic Research Office (April 2025)

Key Findings:

  • Debt sustainability analysis shows Japan faces structural fiscal challenges
  • Combination of persistent primary deficits and demographic pressures creates long-term risks
  • Gradual BOJ monetary policy normalization increases fiscal burden through higher interest rates
  • Fiscal consolidation and monetary normalization must be carefully sequenced

References

  1. International Monetary Fund. “Japan: 2025 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Japan.” IMF Country Report No. 2025/082. April 1, 2025. Available at: https://www.imf.org/en/Publications/CR/Issues/2025/04/01/Japan-2025-Article-IV-Consultation.

  2. International Monetary Fund. “IMF Executive Board Concludes 2025 Article IV Consultation with Japan.” Press Release No. 25/84. April 1, 2025. Available at: https://www.imf.org/en/News/Articles/2025/04/01/pr25084-japan.

  3. International Monetary Fund. “Japan: Staff Concluding Statement of the 2025 Article IV Mission.” February 7, 2025. Available at: https://www.imf.org/en/News/Articles/2025/02/07/mcs-020725-japan.

  4. OECD. “Japan: OECD Economic Outlook, Volume 2025 Issue 1.” June 2025. Available at: https://www.oecd.org/en/publications/2025/06/oecd-economic-outlook-volume-2025-issue-1.

  5. OECD. “OECD Economic Surveys: Japan 2024.” January 2024. Available at: https://www.oecd.org/en/publications/2024/01/oecd-economic-surveys-japan-2024.

  6. ASEAN+3 Macroeconomic Research Office. “Debt Sustainability in Japan.” Working Paper WP/25-05. April 2025. Available at: https://amro-asia.org/wp-content/uploads/2025/04/WP-Debt-Sustainabilty-in-Japan_for-publication.pdf.