Japan's primary deficit will likely be 1.1 trillion yen ($7.6 billion) in fiscal 2025, smaller than the 1.3 trillion yen estimated earlier, but the heavily indebted nation will still miss its goal of turning a surplus that year, the government said Monday.
The new forecast is based on the scenario that the economy will grow 3 percent in nominal terms and 2 percent in real terms over the coming years, with the fiscal rehabilitation target likely met in fiscal 2026 with a 3.1 trillion yen surplus.
The smaller deficit for fiscal 2025 largely reflects spending reforms despite a planned income and residence tax cut in the previous year as part of inflation-relief steps.
In the more conservative baseline case of a growth rate of around 0.5 percent, Japan will not be able to balance its primary budget even in fiscal 2033, the final year of the current projections.
Japan's fiscal health is the worst among advanced economies, with its total debt more than twice the size of its economy.
After massive fiscal spending in recent years to cope with the COVID-19 pandemic and accelerating inflation, the government is seeking to ensure fiscal discipline and remains committed to its fiscal 2025 target of achieving a primary budget surplus.
The primary balance -- tax revenues minus spending, except for debt-servicing costs -- is an indicator of fiscal health.
Consumer prices, which include both energy and fresh food items, are forecast to rise 2.5 percent in fiscal 2024. After that, they are projected to stay around 2 percent in the sanguine economic growth scenario while they will undershoot that level under the baseline scenario.
The Bank of Japan aims to achieve stable inflation, accompanied by wage growth, by looking at core consumer prices, which exclude volatile fresh food.
While the central bank continues to keep long-term bond yields depressed at rock-bottom levels, it now allows the benchmark 10-year yield to climb above 1.0 percent to reduce the side effects of the yield cap program and allow it to better reflect economic fundamentals.
According to the latest estimates, the Cabinet Office expects long-term interest rates to stay around 1 percent at least in the next few years.
