Obstacles mount | Japan Daily Briefing
Takaichi projects calm, but faces growing challenges on fiscal policy and political reform
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While the Takaichi government tries to reassure markets about its commitment to “responsible” fiscal expansion, the LDP is preparing to endorse an income tax hike first proposed in 2023 — though whether Ishin no Kai will sign off is unclear. Meanwhile, the passage of the LDP-Ishin no Kai electoral reform bill is far from assured as opposition parties prepare to discuss their response. Finally, a finance ministry committee reviews JBIC’s budget and has some concerns.
The government reacts to rising rates
With interest rates reaching eighteen-year highs, Prime Minister Takaichi Sanae and other members of her government have continued to try to reassure markets that the government will pursue “responsible” fiscal expansion.
In her regular press conference following the Friday cabinet meeting, Finance Minister Katayama Satsuki suggested that perceptions of the government’s fiscal policies are just one factor among several and echoed remarks from Chief Cabinet Secretary Kihara Minoru Thursday in stressing the government’s desire for “careful dialogue” with investors.
The prime minister, meanwhile, attended a meeting of the Council on Economic and Fiscal Policy (CEFP), where she restated her intention to use responsible fiscal policy to build a “strong economy” while continuing to focus on fiscal sustainability. The CEFP meeting focused on a proposal from the council’s “civilian” members for wide-reaching social security reforms that rebalance spending from the elderly to working-age Japanese. The pathway to realize anything resembling this vision, however, will take considerable time and consent from other parties, limiting its utility as a near-term signal of the government’s commitment to fiscal responsibility.
Tax hikes for defense coming?
Meanwhile, Onodera Itsunori, head of the LDP’s tax commission, said on Friday that there are no objections within the party to implementing the 1% income tax hike in January 2027, one of the tax increases proposed to cover higher defense spending by the Kishida government in 2023. This increase will be offset by plans to phase out a special tax introduced to finance reconstruction in Tohoku. Notably, the LDP’s acceptance of the tax increase includes the prime minister herself, who opposed it when proposed by Kishida initially.
The issue, however, is that even if the LDP is ready to support this tax increase, it still needs to convince Ishin no Kai to support it too – and Ishin no Kai has been opposed to the LDP plan to raise taxes to offset higher defense spending. Ishin may ultimately be forced to compromise on the issue. It is, after all, not opposed to higher defense spending. But it will take some effort on the LDP’s part to convince its junior partner to support this or, it seems, any tax hike. The LDP will also have to convince at least one opposition party to back the plan in the upper house as well, since the tax plan is separate from the budget (which reverts to the lower house’s version if the upper house does not pass it within thirty days).
Electoral reform is far from done
The policy chiefs of six opposition parties will meet on Monday, 8 December to discuss their approaches to the LDP-Ishin no Kai electoral reform bill. While there may not be uniformity – Sanseitō is willing to negotiate with the ruling parties, as discussed yesterday – there is nevertheless widespread skepticism about the legislation that will complicate its passage during the current legislative session.
The LDP’s leadership in the upper house – where the government’s lack of majority is especially challenging – is warning that the bill needs to pass the lower house by 11 December to ensure that the upper house has time to consider it before the session ends on 17 December (assuming no extension). However, although the bill was submitted to the Diet on Friday, the political reform committee has been debating competing campaign finance bills, meaning that the committee will not begin debating the proposal until Monday at the earliest.
With Ishin no Kai insisting that the legislation must pass this session, even if it requires extending the session, this issue could still be a source of friction between the LDP and Ishin no Kai even after LDP leaders overcame backbencher dissent to secure the party’s consent (with some LDP lawmakers reportedly walking out of the meeting instead of giving their consent). Ishin, after all, has already shown a willingness to play hardball with the LDP over this issue and may be willing to do so again.
Even as the parties are bracing for conflict over the LDP and Ishin no Kai’s plan, there is growing discussion among lawmakers from across the political spectrum of how to shift towards a multi-member constituency system.
MOF debates more funding for JBIC
The fiscal and investment loan program subcommittee of the Finance Ministry’s fiscal system council met Friday to discuss budgets for public financial institutions, including the Japan Bank for International Cooperation (JBIC).
The question for JBIC’s budget is how much additional funding it should receive in order to finance investments in the US as part of the USD 550bn (JPY 85tn) investment framework included in the US-Japan trade agreement in July. JBIC is seeking an additional JPY 8.5tn from the Fiscal Investment and Loan Program (FILP) to cover the bank’s obligations to support investments in the US, compared with roughly JPY 1.44tn allocated to JBIC from FILP in 2025. JBIC already received JPY 4.08tn in a supplemental package after the agreement was concluded.
Perhaps a preview for what could happen when the FILP budget goes to the Diet, the committee wondered whether JBIC has the capacity to absorb such an enormous increase in funding and noted that the funding increase would come with a concomitant increase in public scrutiny, not least given the attention paid to the bilateral agreement. (sub-committee notes)
Further reading
How coordination between Chief Cabinet Secretary Kihara and Hagiuda Kōichi is bolstering Takaichi.
The government released its first forecast of the impact of a Tokyo earthquake since 2013, predicting a decline in the economic cost (to JPY 83tn) and human impact due to better construction.
An interview with economic historian Shizume Masato on how economic might and military prowess have been intertwined in modern Japanese history.
Koizumi Shinjirō is the wealthiest member of the Takaichi government; Takaichi herself is tenth.
Prime Minister Takaichi is arranging a meeting with Italian Prime Minister Giorgia Meloni in January.
Takaichi’s first working dinner since taking office was with Asō Tarō and Secretary-General Suzuki Shunichi.
The LDP is preparing to nominate candidates in four Osaka constituencies where its candidates lost to Ishin candidates in 2024.
Economist Noguchi Yukio on the crisis of Ph.D. studies in Japan.