The administration of Japanese Prime Minister Sanae Takaichi has set a goal to reach a nominal gross domestic product (GDP) of approximately 10 quadrillion yen by fiscal year 2040 by stimulating economic growth through large-scale investments.
The Japanese government finalized this plan, known as the Basic Policies for Economic and Fiscal Management and Reform, or the "Honebuto Policy," at a cabinet meeting today (July 21).
This marks the first Honebuto Policy established under the Takaichi cabinet. Its core pillars include large-scale investments to realize a "strong economy," a fundamental shift toward new economic and fiscal management, and a stable reduction of the debt-to-GDP ratio.
Under the Takaichi administration's stance of "responsible active fiscal policy," the goal is to use government investment as a lever to boost growth potential and create a virtuous cycle of wage increases and further investment.
The "Mid-to-Long-Term Economic and Fiscal Plan" included in the policy sets a target to achieve economic growth rates exceeding 1% in real GDP and 3% in nominal GDP at an early stage.
Furthermore, the government has introduced a new category titled "Investment for a Strong and Prosperous Japan," which abolishes budget caps for individual ministries and moves away from the traditional single-year budgeting system in favor of a multi-year budget management approach.
The government and the private sector have agreed to pursue large-scale joint investments in strategic areas that will serve as the next generation of growth engines.
The plan aims to foster these industries and enhance international competitiveness by inducing over 370 trillion yen (3,354 trillion won) in domestic investment across 17 strategic sectors by fiscal year 2040.
The 17 strategic sectors include physical artificial intelligence (AI), semiconductors, unmanned aerial vehicles (drones), shipbuilding including liquefied natural gas (LNG) carriers, the defense industry, quantum technology, aerospace, content, digital and cybersecurity, nuclear fusion, information and communications, and maritime affairs.
The Japanese government estimates that through these investments, annual private capital expenditure will increase to 250 trillion yen (2,266 trillion won) and nominal GDP will reach approximately 1,100 trillion yen (about 10 quadrillion yen) by fiscal year 2040.
This policy does not prioritize fiscal consolidation, which has been emphasized by previous administrations. Regarding the primary balance (PB) surplus, a key goal of past policies, it explicitly states that the government "will not mechanically pursue a single-year surplus."
This reflects an intention to flexibly allocate financial resources to necessary policies such as growth investment and national security.
Instead, the core goal has been set as the stable reduction of the debt-to-GDP ratio. The plan envisions lowering this ratio by increasing GDP through economic growth.
Prior to the cabinet meeting today, Prime Minister Takaichi stated at the Council on Economic and Fiscal Policy and the Japan Growth Strategy Council, "We will break the cycle of excessive austerity and lack of investment in the future, and thoroughly support domestic investment." She emphasized, "We will realize a virtuous cycle based on GDP expansion, where public-private investment induced by the 'Japan Growth Strategy' strengthens supply capacity, increases business profits, and leads to natural growth in tax revenue without raising tax rates."
Japanese media is closely watching how the market will react to the policy announced today.
When the draft of the Honebuto Policy was released on June 30, it faced criticism for focusing solely on active fiscal policy without providing concrete measures for funding or expenditure reform.
Additionally, the section regarding the Bank of Japan only stated that "it is important that appropriate monetary policy management is carried out," which the market interpreted as the government attempting to keep the Bank of Japan's interest rate hikes in check.
This caused a shock in the bond market, with long-term Japanese government bond yields soaring to a 30-year high, leading to what some called a "Honebuto shock."
The finalized policy includes a footnote referencing Article 3 of the Bank of Japan Act, stating that "the Bank of Japan is responsible for the specific means of monetary policy," a phrase that was newly added and not present in the draft.
Regarding this, Minister of State for Economic and Fiscal Policy Minoru Kiuchi stated at a press conference, "This is one of the points revised to reflect the opinions and suggestions of the ruling party."
Seemingly conscious of market anxiety over the active fiscal policy, the Japanese government included a statement in the policy that it will "specify annual government bond issuance amounts while being mindful of securing market confidence."
It also emphasized that it will continue to provide transparent explanations regarding fiscal management to domestic and international investors and market participants.
Meanwhile, the Honebuto Policy includes not only a shift in economic and fiscal policy but also plans to strengthen diplomatic capabilities and independent defense power.
Stating that the security environment surrounding Japan is becoming complex and severe due to China's military expansion and North Korea's nuclear and missile development, the policy specifies that it will quickly review the three key security documents—with a goal of revision within the year—to realize a transformation of defense capabilities within five years.