Japan's plan to return to a budget surplus falls through again as fiscal spending ramps up ahead of the general election.

The latest projections from the Japanese government indicate that the primary budget surplus target originally set for the 2026 fiscal year has fallen through once again and will turn into a deficit, mainly due to Sanae Takaichi's 21.3 trillion yen economic stimulus package rolled out late last year and this week's move to suspend the food tax for two years as part of her campaign pledges.

On January 22, based on forecasts released by the Cabinet at the Economic and Fiscal Advisory Council meeting, the primary budget deficit for the 2026 fiscal year (starting in April) is expected to reach 800 billion yen (about 5 billion USD), in stark contrast to the previously forecast 3.6 trillion yen surplus. Notably, the size of this deficit could further increase. In an effort to gain public support, Sanae Takaichi promised this week to suspend the 8% food tax for two years, which would add about 5 trillion yen in fiscal burden per year, a figure not included in the aforementioned deficit estimate.

These signs of fiscal expansion have triggered concerns in the bond market. On Tuesday, Japan’s 10-year government bond yield rose to its highest level in 27 years, reflecting market worries over fiscal discipline and debt sustainability. While Sanae Takaichi stressed that fiscal health goals would be pursued "flexibly," Japan faces a longer road to structural fiscal balance amid her push for active spending and the pressures of an early election.

The primary budget balance is a core indicator of the extent to which policy spending relies on debt (excluding new bond issuance and interest payments). The Japanese government currently forecasts that if the economy maintains steady growth, a primary budget surplus of 3.9 trillion yen could be achieved in fiscal year 2027.

Except for the asset bubble period from 1986 to 1991, Japan has been in a state of primary budget deficit for a long time, with its debt now exceeding twice the GDP—the highest among developed economies. Since establishing the budget surplus target in the early 21st century, the goal has been delayed multiple times. Sanae Takaichi has stated she will reverse fiscal tightening policies and set new multi-year fiscal targets to increase spending flexibility.

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