Fiscal Confidence: Warnings from the Market Must be Taken Seriously

Editorial

15:13 JST, July 26, 2025

The ruling and opposition parties should recognize that the era when tax and fiscal policies could be implemented without much concern for the cost of interest payments on debts is over. Under the new power balance in the Diet, they must cooperate on responsible policies.

As a result of the House of Councillors election, the ruling coalition of the Liberal Democratic Party and Komeito has become a minority in both houses of the Diet. Therefore, the opposition parties, which have advocated such measures as consumption tax cuts, are expected to intensify their offensive, and there is a growing sense of caution in the market over fiscal deterioration.

The fact that Japanese government bonds are being sold off, causing long-term interest rates to rise, may be a sign of this concern. The rate surged to 1.605% on July 25 — the highest level in about 17 years.

During the “lost 30 years” when the Japanese economy was stagnant for a prolonged period, wages and prices did not rise, and ultra-low interest rates were the norm. This likely helped keep interest payments on government bonds from rising and contributed to more relaxed fiscal discipline.

However, the Bank of Japan ended its large-scale monetary easing policy in spring last year and has reduced its purchases of government bonds. Now the government is trying to shift to an economy where wages and investment both rise to bring the economy out of its prolonged stagnation.

Amid such changes, the total amount of outstanding government bonds has reached about ¥1.1 quadrillion. If fiscal confidence continues to be neglected and thereby long-term interest rates rise, the risk of ballooning interest payments will also increase.

The ruling and opposition parties will surely have to take the changes of the times and warnings from the market seriously.

Regardless, under the new Diet power balance, tax cuts are likely to become the central focus of debate. Opposition parties aim to abolish the provisional gasoline tax rate and are considering submitting a bill to the extraordinary Diet session to be convened on Aug. 1.

In the last ordinary Diet session, a bill submitted by opposition parties to abolish the provisional gasoline tax rate was passed in the House of Representatives. However, in the upper house, where the ruling parties held a majority, the bill was not put to a vote and was scrapped. Completely removing the provisional gasoline tax rate would result in an annual reduction of ¥1.5 trillion in tax revenue for the central and local governments.

How would the shortfall be covered? In addition, if the price of gasoline drops and consumption increases, it would run counter to the trend of decarbonization.

There is likely to be intense debate over consumption tax cuts and cash handouts as measures against high prices. Tax cuts themselves are likely to be welcomed by many people, as they would ease the burden on household budgets.

However, it would be irresponsible for the opposition parties to focus solely on the benefits. If they also factor in the burdens associated with the cuts, the public response is unlikely to be entirely positive.

Consumption tax is a core revenue source for supporting the social security system, which includes pensions and medical care. Unless revenue sources are secured, cuts to social security services will be inevitable.

Relying on government bond issuance passes the bill along to younger generations. If the future grows more uncertain, consumption will not be stimulated. The ruling and opposition parties should face these issues squarely and deepen discussions.

(From The Yomiuri Shimbun, July 26, 2025)