Takaichi administration's macro policy reaches a critical juncture, with June potentially a key turning point for both monetary and fiscal policy, Nomura Securities' Morita Kyohei (森田 京平)

Nomura Securities expects macroeconomic policy under the Sanae Takaichi administration to reach a critical juncture this summer. On fiscal policy, it pointed to the Basic Policy on Economic and Fiscal Management and Reform, the interim report of the National Council on Social Security and discussions on a consumption tax cut. On monetary policy, it said the focus would be on whether the Bank of Japan raises interest rates. The bond market may have priced in an annual expansion of the deficit by slightly more than ¥10 trillion, while concerns about a behind-the-curve scenario would intensify if the administration urged the Bank of Japan to take a cautious stance on rate hikes.

There are said to be at least 5 types of behind-the-curve scenarios, with the fourth, "fiscal dominance," identified as a risk to watch in connection with fiscal management under the Takaichi administration. June will also see an interim assessment of the plan to reduce government bond purchases, and attention will center on whether the current plan is maintained.

Under the current plan, the Bank of Japan will reduce its government bond purchases by approximately ¥200 billion each quarter from April 2026 through March 2027. If the plan continues, purchases in March 2028 could be approximately ¥1.3 trillion, approaching their lowest level in 18 years. Meanwhile, the Bank of Japan's balance sheet has contracted to a level below approximately 100% of GDP for the first time in 7 years, prompting calls for discussion that also considers its relationship with fiscal management.

Key fiscal policy issues in June include Cabinet approval of the Basic Policy on Economic and Fiscal Management and Reform, the interim report of the National Council on Social Security and the submission of the FY2026 supplementary budget bill to the Diet. An estimate has indicated that the debt-to-GDP ratio would remain broadly stable if the primary balance deficit were kept within 1% of GDP, underscoring the indicator's importance in assessing fiscal sustainability. Discussions on a consumption tax cut involve numerous uncertainties regarding timing, scope and funding, and the key issue is how the funding debate will be incorporated into the National Council's interim report in June.