Japan’s government has announced a cut in general spending for the first time in 12 years, amid speculation that the central bank in Tokyo may soon abandon the ultra-loose monetary interest policy it has implemented for nearly two decades, Reuters reported.

The draft budget for the next fiscal year, which begins in April 2024, is estimated at 112.07 trillion yen (about $787 billion), down 2 percent from this year’s budget of 114.4 trillion yen.

However, it will remain above the ¥110 million mark for the second year in a row in the context of massive new spending by the executive branch to increase the country’s military capabilities in the context of threats posed by Russia, North Korea and China. .

Another important component of budget spending will be the social assistance programs that his government is preparing to try to reverse the disastrous demographic trend in the country.

But the world’s third-largest economy is under pressure to return to a healthy fiscal path in the face of the prospect of higher benchmark interest rates after spending during the COVID-19 pandemic worsened the country’s public debt.

Japan has the highest debt-to-GDP ratio among advanced economies.

Japan is cutting government spending, but economists aren’t necessarily impressed

In a new budget plan, Fumio Kishida’s government has predicted that benchmark interest rates will rise in the next fiscal year, the first in 17 years.

But Japan’s central bank has kept key interest rates very low for more than 20 years, fueling fiscal indiscipline in a country with public debt twice its GDP.

“Most of the spending cuts are due to reduced reserves for Covid-related emergencies. If we exclude these factors, we will see that the spending reform is not impressive,” says Takahide Kiuchi, an economist at the Nomura Research Institute.

“Politicians must realize the risk of the crisis and conduct a responsible fiscal policy, as the Bank of Japan normalizes monetary policy. An unexpected increase in base interest rates will further worsen the state of public finances,” he adds.

Tokyo’s Finance Ministry has drawn up a budget plan that assumes the base interest rate will rise from 1.1 percent to 1.9 percent, which would mean a ¥27 million increase in interest paid on government debt in the 2024/25 fiscal year, a 7 percent increase. more compared to the current year.