- The Japanese Cabinet Office has revised its forecast for the real GDP growth rate for fiscal year 2026, lowering it by 40 basis points from 1.3% to 0.9%. The growth rate for private consumption has also been adjusted down to 0.9%, while inflation expectations have been raised by 30 basis points to 2.2%.
- The basic fiscal balance deficit for fiscal year 2026 is expected to widen to 1.2 trillion yen, with the yield on 10-year Japanese government bonds rising to 2.805%. The USD/JPY exchange rate is fluctuating around 163.5.
- Japanese Prime Minister Sanae Takaichi has proposed a temporary reduction in the food consumption tax rate to 1% for two years starting from April next year. There is a marginal divergence in the economic outlook assessments between the Bank of Japan and the government.
Downward Revision of Macroeconomic Expectations and Inflation Pressure
The latest assessment report released by the Japanese Cabinet Office indicates that the rise in international crude oil prices, triggered by escalating geopolitical tensions in the Middle East, is significantly suppressing domestic demand. The government has revised its real GDP growth forecast for fiscal year 2026 from 1.3% to 0.9%. Although wage growth and policy support provide some buffer, high imported energy costs have slowed private consumption expectations from 1.3% to 0.9%. Meanwhile, inflation expectations have been raised from 1.9% to 2.2%, indicating that the pressure from rising prices is spreading more than anticipated.
Fiscal Deficit Pressure and Tax Reduction Initiative
In terms of fiscal balance, the basic fiscal balance deficit for fiscal year 2026 is expected to expand to 1.2 trillion yen, reflecting the increased public financial burden due to additional budget expenditures, which offsets the positive effects of tax revenue growth. To alleviate public dissatisfaction with real wage growth lagging behind price increases, Prime Minister Sanae Takaichi has proposed a temporary tax reduction plan to lower the food consumption tax rate from its original level to 1% starting next April for two years. However, this proposal has further raised market concerns about the long-term fiscal sustainability.
Steepening Yield Curve and Central Bank Policy Divergence
Due to U.S. military actions against Iran and the Federal Reserve's decision to keep the benchmark interest rate unchanged, risk aversion sentiment has increased in the foreign exchange market, with the USD/JPY remaining around 163.5. In the bond market, concerns about persistent inflation and expanded fiscal supply have led to sell-offs, pushing the yield on 10-year Japanese government bonds up to 2.805%. Unlike the government's cautious stance, the Bank of Japan maintains a relatively optimistic assessment of the medium- to long-term economic outlook. The market is closely watching the upcoming monetary policy meeting, as its hawkish or dovish tone will directly determine the yield curve's trajectory.
