Japan to launch expansionary fiscal policy from 2027, targeting 3% nominal GDP growth

Japan's government under Prime Minister Takaichi Sanae has declared a shift toward expansionary fiscal policy, setting targets of 3 percent nominal GDP growth and 1 percent real GDP growth, Kyodo News and the Yomiuri Shimbun reported Tuesday.

The government convened its Council on Economic and Fiscal Policy on Monday and presented a draft of the "Honebuto" (basic policy) guidelines on economic and fiscal management and reform that includes the new direction.

The draft designates fiscal year 2027 (April 2027 to March 2028) as the "inaugural year of responsible expansionary fiscal policy" and sets out a goal of establishing a medium- to long-term economic and fiscal plan through fiscal year 2040. The government intends to pursue fiscal expansion centered on growth sectors beginning with the fiscal 2027 budget.

Under the new framework outlined in the draft, the government would create a new "Investment in a Strong and Prosperous Japan" category that places no ceiling on individual ministry budgets in relevant fields. The category aims to achieve nominal GDP growth of at least 3 percent and real GDP growth of 1 percent at the earliest opportunity.

The draft also calls for moving away from the current single-year budgeting system in favor of a multi-year budget management approach.

The government envisions using multi-year projects and an uncapped investment framework to concentrate spending across 17 designated growth strategy sectors as a driver of economic expansion.

The Takaichi administration had earlier set a goal of channeling government investment into 17 sectors — including physical AI, semiconductors, drones and shipbuilding — to stimulate private investment and strengthen the international competitiveness of key industries.

Speaking at Monday's Council on Economic and Fiscal Policy, Prime Minister Takaichi said she would pursue "a fundamental shift to a new approach to economic and fiscal management that does not follow the same path as before" and vowed to "fundamentally change the way budgets are compiled."

However, Japanese media noted that the new policy direction has drawn concern that loosening fiscal discipline could lead to a deterioration in the country's fiscal health.

The draft also addresses the Bank of Japan, stating that "appropriate monetary policy management is extremely important for realizing a strong economy." The language is widely interpreted as a message urging caution on interest rate hikes that, while curbing inflation, could risk cooling the economy.

The Honebuto guidelines are expected to be formally adopted at a Cabinet meeting later this month.