Takaichi Seeks New Ways to Pay for Tax Cuts, Defense and Big Investment Push

The promise and the clock

By the end of the year, Sanae Takaichi must lay out the financing for a wide-ranging program that combines a two-year reduction in the food sales tax, increased defense spending, and a multi-year effort to raise growth.

Central to the package is a blueprint to mobilize ¥370 trillion from both public and private sources through fiscal 2040, spanning 17 strategic areas including artificial intelligence and semiconductors. The aim is to boost Japan's productive capacity without leaning on a surge in new debt.

She also gave markets a measuring stick. Takaichi cited about ¥40 trillion of bond issuance in the previous fiscal year and said she would aim for a comparable level in the next budget, creating a yardstick for investors to judge whether alternative revenues truly cut borrowing.

Tapping FX surpluses - with limits

Policymakers are looking at the Foreign Exchange Fund Special Account - the vehicle that contains most reserves and funds currency intervention. A weak yen and higher overseas rates have fattened its earnings, and private members of a government advisory panel recently urged tapping more of those gains.

Finance Ministry guidelines typically keep at least 30 percent of any surplus in the account as a buffer against currency risk, with much of the rest moved to the general account. For fiscal 2025, the account produced roughly ¥5.1 trillion in surplus. Around ¥3.1 trillion - roughly 60 percent - flowed into the following year's general account. In FY23, ¥1.2 trillion was directed to defense before calculating the surplus.

There are clear caveats. If overseas rates fall or the yen strengthens, profits could shrink. Intervention to calm market swings could also keep drawing on the fund. In plain English: this income moves around more than tax receipts, so bigger transfers today cannot be assumed to last.

Takeshi Makita of the Japan Research Institute said that, for the moment, routing a larger share of the fund into the general account appears relatively safe; however, he cautioned against turning it into a standing practice because of the uncertain outlook. He expects surpluses to narrow as the US Japan rate gap closes and authorities move to limit further yen weakness. Or as he put it, "It's not like there's some magic money pot they can keep dipping into."

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Loans, guarantees and the private side

To help reach that ¥370 trillion goal, the Industry Ministry wants banks to lend more. One tool is to broaden a two-step lending framework: the Japan Finance Corporation - backed by the state - provides funds to banks and other lenders, which then on-lend to businesses. The ministry wants to enlist megabanks and regional lenders via variants tailored to crisis-response investment, so that smaller businesses can obtain financing more easily.

Another proposal would have the government take on a portion of banks' losses when borrowers default - coverage that, until now, has been used mostly in emergencies like natural disasters and the pandemic. That guarantee carries fiscal risk because any shortfall could end up being covered through the general account, warned Keio University's Takero Doi. He downplayed moral-hazard worries, pointing out that private banks could pair government-backed two-step loans with their own credit, potentially boosting overall funding while preserving incentives to judge risk.

BOJ remittances and cutting waste

The Bank of Japan plans to accelerate annual sales of exchange traded funds to ¥860 billion from roughly ¥330 billion starting next year. Bloomberg Economics estimates that could add about ¥800 billion a year to the central bank's remittances to the government. On Friday, Takaichi said those extra proceeds should fund investments critical to economic security. The BOJ also said it can slow sales depending on market conditions, and those asset values will move with markets.

There is also a push to cut waste. A unit created last year is scrutinizing subsidies, tax incentives, and public funds to find areas to save. Japan has roughly 200 public funds holding around ¥7 trillion. Pulling that money back will be politically delicate.

Many subsidies and tax preferences benefit influential industries, and an aggressive approach could face resistance from interest groups and ruling party lawmakers. Takaichi's support within the party is seen as weaker than some predecessors, and cutting programs households and businesses rely on could alienate voters she hopes to keep. "Of course, Takaichi may read the room and avoid cuts that would make her unpopular," said Doi, who serves on the Fiscal System Council.

The investor angle

The thread through these tools is durability. FX transfers, BOJ remittances and loss guarantees can deliver sizable sums now, but they shift with markets, exchange rates and policy choices. The government may assemble substantial funding outside bonds for a time. The bigger question is how long those streams last and whether tapping them creates longer term tradeoffs.

Ultimately, the market will measure Takaichi against her own yardstick. Doi put it plainly: "I'd like to see some concrete results as soon as possible, particularly in terms of how much these efforts will actually help curb government bond issuance." For your portfolio, watch whether non tax revenue and reserve transfers hold up, whether the BOJ sustains faster ETF sales, and whether politics allows meaningful subsidy clawbacks.

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