A persistent but sustainable primary deficitJapan’s primary balance deteriorated in 2026 to -1.2% of GDP, ending five consecutive years of improvement. The deficit is projected to widen further in 2027 to more than 2% of GDP, reflecting in particular the suspension of the consumption tax on food.
The government has shifted its fiscal anchor from a consolidation target (primary surpluses) to a sustainability target (no increase in the debt-to-GDP ratio). Beyond 2028, the primary deficit is projected to settle around -2% of GDP. It would remain below the debt-stabilising level, but by an increasingly narrow margin.
A favourable interest rate-growth differentialNominal growth would continue to exceed the apparent interest rate on Japan’s debt, but this advantage would erode gradually. The apparent rate, close to zero through 2026, is projected to approach 1.6% by 2023 as debt is refinanced at higher rates amid monetary normalisation. Nominal growth is expected to remain robust, at around 3%, underpinned by the new growth and inflation regime. The r-g differential would therefore remain favourable, albeit to an increasing extent, narrowing the margin between the primary balance and its debt-stabilising level.
