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 can be run 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.

Given that the August 2025 estimate had forecast a ¥3.6 trillion surplus, that is a worsening of about ¥4.4 trillion, equivalent to 0.7% of nominal GDP.

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 last November's economic package is a major drag on the primary balance.

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.

Interestingly, 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.

Fiscal experts have questioned this "dual structure." A pattern of showing surpluses in the initial budget while deficits persist in the combined national-and-local reality has been criticized as evidence that fiscal-consolidation targets have become hollow.

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.

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.

In Japan, debate continues over the balance between fiscal health and economic growth. Will "responsible proactive fiscal policy" lead to sustainable economic management, or add to the burden on future generations? How does your country handle debates over fiscal deficits and national debt? We'd love to hear your thoughts.

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