(Bloomberg) -- Japan expects to hit its primary balance goal in the year starting April 2025, finally achieving the long-standing goal for fiscal health after more than a decade of delays.
The primary balance, which excludes net interest payments on public debt, is projected to be around ¥800 billion ($5.2 billion), or about 0.1% of gross domestic product in fiscal year 2025, according to the Cabinet Office’s mid-to-long-term outlook report Monday. This marks an improvement from the ¥1.1 trillion deficit, or -0.4% of GDP predicted in January, and would be the first surplus since the government set the target in 2002.
Japan’s government initially aimed to achieve the goal in fiscal year 2011 but kept pushing it back for over a decade.
The improved forecast will ease some of the pressure on the government, which faces ballooning social security costs and defense spending. Prime Minister Fumio Kishida reaffirmed last month his commitment to achieving a primary balance surplus next fiscal year in his economic and fiscal policy plan. It also somewhat reassures market players watching Japan’s fiscal health and yields, at a time when the Bank of Japan is seen to be raising rates further this year.
The projected surplus is partly driven by higher tax income, which is expected to push up total revenues by about ¥1.6 trillion. Last fiscal year, Japan’s tax income reached a record ¥72.1 trillion ($469 billion), as the weak yen and rising prices boosted business performance.
On the expenditure side, price hikes are expected to lead to an extra ¥400 billion in spending, though this is set to be offset by a ¥700 billion reduction through expenditure reforms, the report said.
Still, Japan’s finances remain strained due to its mountain of debt. Japan’s general government debt was a size equivalent to 255% of its economy this year, the largest debt load among developed nations, according to the International Monetary Fund. The primary balance forecast does not take into account the debt and associated servicing costs.
With the BOJ’s policy tightening, the difficulty of managing the country’s debt payments is expected to become worse. Interest payments on outstanding debt will likely rise at a double-digit clip in the coming years as interest rates climb, according to the finance ministry’s estimates earlier this year. An expert panel has emphasized the need to closely monitor the impact of rising interest rates and government bond issuance on yields.
The government’s forecast also doesn’t include potential spending for additional economic packages. Kishida announced last month that he will unveil a fresh economic package this fall to ensure a complete exit from deflation.
Separately, the government expects the country’s headline inflation figure to stabilize at 0.9% in the longer term under the baseline scenario. For the current fiscal year, inflation is projected to be around 2.8%.
The central bank is set to hold a two-day meeting starting Tuesday, with most economists seeing risks of a rate hike with details of the bond-buying cut plan, according to the latest Bloomberg survey. The BOJ is also expected to release its updated economic outlook, including an inflation forecast.
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