Japan's budget surplus plan faces further delay as Takaichi pushes spending

By Makiko Yamazaki

TOKYO, Jan 22 (Reuters) - Japan's plan to return to a primary budget surplus for the first time in decades has been pushed back again, as Prime Minister Sanae Takaichi presses ahead with what she calls a "proactive" fiscal policy.

The forecast deficit for the next fiscal year, presented at a meeting of the government's top economic council on Thursday, could be widened even further as it does not account for Takaichi's election promise to suspend an 8% tax on food for two years.

The plan, which Takaichi announced on Monday when calling a snap election in February, spooked bond investors, sending the benchmark 10-year Japanese government bond yield to a 27-year high on Tuesday.

Suspending the food tax would cost about 5 trillion yen ($32 billion) per year.

The primary budget balance, which excludes new bond sales and debt-servicing costs, is a key gauge of the extent to which policy measures can be funded without resorting to debt.

The latest projection shows a primary budget deficit of 800 billion yen ($5 billion) for fiscal 2026 starting April, compared with an earlier forecast of a 3.6 trillion yen surplus — a reversal driven largely by 21.3 trillion yen in stimulus spending under Takaichi that was launched late last year.

The government now expects to achieve a 3.9 trillion yen surplus in fiscal 2027, assuming that Japan's economy will continue to grow at a modest pace.

PLANS TO RETURN TO SURPLUS DELAYED MANY TIMES

Except for the asset bubble period between 1986 and 1991, Japan's primary budget balance has been in deficit for most of the postwar era, resulting in a vast debt pile more than twice the size of its economy, the worst among developed economies.

Plans to return to a budget surplus - a goal first introduced in the early 2000s - have been pushed back multiple times.

Takaichi has said she would reverse fiscal austerity and set a new fiscal target extending through several years to allow more flexible spending, rather than checking progress toward achieving the surplus target each fiscal year.

Takaichi said on Thursday at the end of the council meeting she would aim to secure the confidence of financial markets by stably reducing the debt-to-GDP ratio.

She didn't comment on the recent bond market rout, but mentioned a proposal from the council's private-sector members that confirming the level of interest payments on debt is important for maintaining credibility in a phase of rising interest rates.

($1 = 158.3500 yen)