Japan's primary balance, once projected in August 2025 to run a surplus of ¥3.6 trillion, has swung in just half a year to a deficit of ¥800 billion. Under the Takaichi administration's "responsible proactive fiscal policy," a supplementary budget of more than ¥18 trillion is shaking the balance of the nation's finances. What happened?

Why the Primary Balance Matters

The primary balance (PB) is an indicator of how much of the government's policy spending can be covered by tax and other revenue without relying on government bonds. A surplus means the year's public services are covered without borrowing.

The Japanese government long held up "a primary balance surplus in fiscal 2025" as its fiscal-consolidation goal. In a July 2024 estimate, strong corporate earnings and rising tax revenue seemed to finally bring that surplus within reach.

The Fall to an ¥800 Billion Deficit

On January 22, 2026, the Cabinet Office presented its medium- to long-term estimate to the Council on Economic and Fiscal Policy. It projects the combined national and local primary balance for fiscal 2026 at a deficit of ¥800 billion.

The August 2025 estimate had forecast a ¥3.6 trillion surplus, so that is a swing of about ¥4.4 trillion in half a year, equivalent to 0.7% of nominal GDP.

The Cabinet Office itself frames the number differently, calling the FY2026 national and local PB the most improved since fiscal 2001, when the surplus target was first adopted, and describing revenue and spending as roughly in balance.

The Main Drivers of the Reversal

A Massive Supplementary Budget

The biggest factor is the scale of the fiscal 2025 supplementary budget. Drawn up by Sanae Takaichi's administration, it exceeded ¥18 trillion on a general-account basis, the largest since the COVID-19 period. The additional spending tied to the November 2025 economic package, along with an overshoot in local personnel costs within the supplementary budget, pushed the primary balance down.

Measures for the "Income Wall"

The FY2025 tax reform's increase in the basic income-tax deduction and related thresholds (the so-called raise from the "¥1.03 million wall" to "¥1.23 million") is also weighing on finances, cutting tax revenue by roughly ¥700 billion.

FY2025 Also Worsens to a ¥7 Trillion Deficit

Beyond fiscal 2026, the fiscal 2025 PB deficit is now projected to worsen sharply, from ¥3.2 trillion to ¥7 trillion. The government's "fiscal 2025 surplus goal" has effectively become unattainable.

The Reality of "Responsible Proactive Fiscal Policy"

Since taking office, Prime Minister Takaichi has made "responsible proactive fiscal policy" a pillar of her agenda. The plan is to drop the single-year PB-surplus target and shift to a new multi-year indicator that holds the growth of debt within the range of nominal growth.

The fiscal 2026 initial budget (on a national general-account basis) shows a PB surplus of ¥1.3429 trillion, the first in 28 years since fiscal 1998. But that is strictly on a "national, general-account, initial-budget basis"; the picture differs on a settlement basis that includes local governments.

The initial budget shows a surplus while deficits persist in the combined national-and-local reality. Fiscal experts read that "dual structure" as evidence that consolidation targets have been hollowed out.

Market Reaction and Interest-Rate Risk

Amid concern over fiscal discipline, long-term interest rates have kept trending up in financial markets. Japan's government debt stands at about 230% of GDP, by far the highest among the G7 (even Italy, the next-highest, is around 136%).

In the fiscal 2026 budget, debt-servicing costs exceed ¥31 trillion, and the growing burden from rising rates is becoming apparent. Among market participants, there is spreading concern that further fiscal expansion could raise the risk of a downgrade to Japanese government bonds.

The Outlook Ahead

The government aims to pass the fiscal 2026 budget early, submitting it to the ordinary Diet session. But with a minority-ruling-party framework, it must secure opposition cooperation to enact the budget, which could bring further pressure to increase spending.

Update: Prime Minister Takaichi dissolved the lower house at the opening of the ordinary Diet session in January 2026, and the LDP took 316 seats in the February general election. The FY2026 budget cleared the lower house on March 13 but, with the ruling bloc short of a majority in the upper house, was not enacted until April 7. It was the first time since fiscal 2015 that an initial budget slipped into April.

At the Council on Economic and Fiscal Policy, private-sector members have called for a scenario that steadily lowers the debt-to-GDP ratio. The Takaichi administration has signaled a shift "from supplementary to initial" in budgeting, but whether the scale of future supplementary budgets is restrained looks set to shape the course of fiscal consolidation.

Will "responsible proactive fiscal policy" produce sustainable public finances, or simply defer the bill to future generations? With the single-year surplus target abandoned, even the yardstick for answering that is now in dispute. How does your country handle debates over fiscal deficits and national debt? We'd love to hear your thoughts.

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