TOKYO - The Japanese government on Thursday cut its economic growth outlook to 0.9 percent for the current fiscal year from April, down from an earlier estimate of 1.3 percent as higher crude oil prices hit the import-reliant economy.
The Cabinet Office also unveiled its latest projections for the primary balance, a key indicator of a country's fiscal health, expecting a 1.4 trillion yen ($8.6 billion) surplus in fiscal 2027 on a boost in tax revenues, compared with last month's estimate of a deficit of 2.1 trillion yen.
The improved projections for the primary balance -- calculated by subtracting spending from tax and other revenues, excluding government bond interest payments -- come as financial markets remain concerned that Prime Minister Sanae Takaichi's push for aggressive spending to boost growth will further worsen the heavily indebted country's finances.
"In promoting the shift to responsible and proactive public finances, we will also secure confidence from the market by communicating with the market carefully with high transparency," Takaichi told the Council on Economic and Fiscal Policy at her office where the latest economic outlooks were presented.
A surplus in the primary balance -- meaning tax and other revenues exceed spending, excluding debt-servicing costs -- indicates the government can cover its expenses without new bond issuances.
Still, the Cabinet Office said in the report that it foresees a larger deficit of 1.2 trillion yen in fiscal 2026, up from the 800 billion yen deficit projected earlier, due to the need to finance a supplementary budget for the year.
In its midyear report, the government said that the weaker yen against the U.S. dollar and elevated oil prices resulting from the conflict in the Middle East pose risks to the Japanese economy, despite the fact that wage growth and a rise in personal consumption have been bolstered by government subsidies for energy costs.
The Cabinet Office's forecast said that the government expects the yen to trade at 161.4 against the U.S. dollar, which is much weaker than the projected 155.2 in January. The forecast also said that crude oil prices will rise to 92.5 dollars per barrel, surging from the previous estimate of 68 dollars.
Resource-poor Japan is vulnerable to rises in crude oil prices, while the weaker yen against the dollar contributes to raising import costs.
For the 2027 fiscal year starting next April, the government said GDP will expand 1.1 percent on the back of Takaichi's push for boosting investments in crisis management and strategic growth sectors -- a move that is expected to spur recovery in personal consumption and increase capital investments.
To promote public-private investments, the Takaichi Cabinet on Thursday approved guidelines for drafting the state budget for the year starting next April, featuring a newly created investment allotment for creating a "strong and prosperous Japan," under which ministries can make budget requests without upper limits.
The requests will be assessed in the budget-making process based on factors such as whether they will contribute to growth by generating investment returns. The process will also include a multiyear budget framework to enhance predictability for executions of the projects.
Finance Minister Satsuki Katayama said the officials could utilize sophisticated generative AI in their discussions, taking a different drafting approach from before.
