While the investment budget is considered modest in the FY2027 budget requests, investment spending is expected to increase by approximately 2 times, against a backdrop of rising long-term interest rates and a review of the social discount rate.
This article examines trends in the investment budget under the FY2027 budget requests and the background to them. It explains that while investment spending is said to have increased in the budget requests, it is expected to remain modest overall.
The factors in the long-term interest rate equation are identified as short-term interest rates, the Taylor rule, and debt outstanding as a percentage of GDP. The rise in long-term interest rates is attributed to expectations of future short-term rate hikes and stable inflation expectations. The author is introduced as having estimated the long-term interest rate at 3% on social media.
Long-term interest rates are said to be rising not only in Japan but across the G7, and the view is expressed that raising concerns about fiscal conditions is misguided. The increase in investment spending in the budget requests is attributed to the appropriate adjustment of the social discount rate, which could affect investment approvals going forward.
The view is expressed that appropriately adjusting the social discount rate will increase the number of investment projects previously not approved, making the increase in investment spending only natural. The commentary is provided by Takahashi Yoichi (高橋洋一), professor at Kaetsu University.