Looming fight over Japan's "debt ceiling"? | Japan Daily Briefing
Takaichi talks fiscal responsibility again, but another challenge awaits in 2026
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Prime Minister Takaichi defended her approach to fiscal policy in the upper house budget committee, but her government may also need to prepare for a challenge over legislation that allows the government to issue bonds. Meanwhile, the Bank of Japan (BOJ) is preparing to discuss a rate hike next week, the LDP and Ishin no Kai are signaling defeat on electoral reform, and Defense Minister Koizumi Shinjirō talked China (and defense spending) with his US counterpart.
As Takaichi stresses responsibility, quiet threat to bonds looms
In deliberations in the upper house budget committee on Friday, 12 December Prime Minister Takaichi Sanae again defended her position on shifting from a single-year primary balance target to a standard that pursues a balance over the course of a multi-year cycle, again asserting that she is mindful of the need to demonstrate a real commitment to fiscal sustainability.
However, regardless of Takaichi’s intentions, the government may be facing a looming challenge in 2026, effectively Japan’s answer to the periodic US debt ceiling crises. The Takaichi government will have to pass a bill – required once every five years – that enables the government to issue deficit bonds. This bill, once required yearly, was relaxed during the second Abe government and now for the first time will have to be navigated through a “twisted” Diet. The bill must pass both houses; unlike the budget, the lower house does not have supremacy.
Constitutional Democratic Party (CDP) leader Noda Yoshihiko undoubtedly remembers how the Liberal Democratic Party (LDP) and Kōmeitō withheld their support for the bill to force Democratic Party of Japan (DPJ) Prime Minister Kan Naoto to quit in 2011 and force Noda himself to dissolve the Diet in 2012 and could seek to leverage the bond bill against the government in 2026. Other opposition parties could use also try to leverage their votes in the upper house, which could spook markets either by raising the risk that debt issuance could be held up or by forcing the Takaichi government to make concessions on tax cuts and other fiscal measures to ensure the bond bill’s passage.
BOJ prepared to discuss rate hike
With less than a week until the Bank of Japan’s (BOJ) 18-19 December policy board meeting, the board is preparing to consider a twenty-five basis point increase that would raise the BOJ’s policy rate to 0.75%, its highest level since 1995. Nikkei estimates that this proposal would have the support of a majority of the nine-member board.
It appears that despite past opposition from Takaichi to the BOJ’s intention to raise rates, her government is not opposed to a rate hike this month, though the government may be reluctant to support a more aggressive schedule for rate hikes in 2026. Ultimately, the test going forward could be whether the rate hike helps tame some of the cost-push inflation and create more opportunity for real wage increases that could drive demand-pull inflation. The bank is reportedly encouraged by early signs for the 2026 wage negotiations, strengthening its determination to raise rates now.
LDP and Ishin ready to concede on electoral reform?
LDP and Ishin officials met on Friday to discuss the outlook for their bill that would mandate a forty-five-seat reduction in the size of the House of Representatives in the absence of an alternative agreement on electoral reform. The officials all but conceded that, with the bill blocked from consideration by the lower house’s political reform special committee by competing campaign finance reform bills, there is virtually no chance that it will pass during the current legislative session. The session is scheduled to end on 17 December, but the LDP appears to have little appetite to extend the session to facilitate the bill’s passage; even if it were to pass the lower house, it would still need to secure the support of at least one opposition party in the upper house to become law.
Ishin no Kai co-leader Yoshimura Hirofumi expressed his frustration with the “do nothing Diet,” but it seems for the moment that Ishin no Kai will do little more than complain about the legislature and at least some parts of the LDP instead of threatening the partnership with the government. Prime Minister Takaichi is expected to meet with Yoshimura on 16 December as Ishin no Kai’s frustration with the LDP has become more visible. Their secretaries general will meet on Monday, 15 December.
Koizumi and Hegseth talk
Defense Minister Koizumi Shinjirō spoke for forty minutes with US Secretary of Defense Pete Hegseth on Friday, 12 December to discuss the aftermath of the incident involving a Chinese fighter targeting Japanese fighters with its radar. According to a US readout of the call, it also extended to Japanese defense spending, shortly following a speech by Hegseth in which he called for all allies to join NATO in targeting defense and defense-related spending reaching 5% of GDP, though Japan’s Ministry of Defense denied that the discussion focused on specific figures.
Further reading
Politics
While there was little risk either way, CDP leader Noda Yoshihiko confirmed on Friday that the party would not submit a no-confidence motion.
Even as it calls for “self-sacrificing reforms,” Ishin no Kai lawmakers have faced questions about their finances.
How a snap election could happen in early 2026.
National security
A high tempo of fighter scrambles is exacting a toll on the personnel and equipment of the Self-Defense Forces.
The LDP and Ishin no Kai have stepped up their discussions on relaxing arms exports restrictions that could expand which countries could receive exports and what kind of equipment Japan could export, though they are also discussing how to monitor exports to ensure they are not misused.
The Japanese government provided additional details about the joint exercise by Russian and Chinese bombers on 9 December, revealing that they appeared to be positioning themselves to fly towards Tokyo.
A month after the Chinese government recommended that Chinese nationals avoid Japan, the impact has been visible, including the cancellation of more than forty percent of the flights between Japan and China.
Economic policy
The Ministry of Economy, Trade, and Industry (METI) is preparing to establish a facility for manufacturing prototypes of advanced semiconductors in Chitose, home of Rapidus.
Meanwhile, consortium of private businesses is preparing to make a sizable investment in Rapidus itself.