Prime Minister Sanae Takaichi’s decisive election victory on February 8 has increased the likelihood of more expansionary fiscal policy in Japan over the coming years, according to Fitch Ratings. While the agency had already incorporated post-election easing and wider deficits into its overall January affirmation of Japan’s A rating with a stable outlook, it does caution that the scale of stimulus could exceed its current assumptions. If this happens, it would carry implications for the country’s future fiscal trajectory and, in time, its credit profile.
Takaichi’s Liberal Democratic Party (LDP) secured a total of 316 seats in the Lower House, up sharply from 198 in the previous ballot, in the process delivering a two-thirds supermajority. Together with its coalition partner, the Japan Innovation Party, the ruling bloc now controls 352 seats, compared with 230 before the snap election. Takaichi only called the election in January, just months after taking office in October as she sought to capitalise on her strong approval ratings and to secure a solid mandate for her policy platform.
The campaign primarily centred on cost-of-living relief for households, including measures to lift economic growth and how to take a firmer stance on immigration and national security. The scale of the victory now leaves the government well placed to implement its agenda with limited parliamentary resistance from any credible opposition force. Crucially, the two-thirds majority also enables the Lower House to override Upper House vetoes, reducing procedural constraints where the coalition lacks control in the upper chamber.
Fitch further expects Japan’s fiscal deficit to widen from 1.4% of GDP in FY24 to 2.4% in FY25, the year ending March 2026, and to approach as much as 3.7% by FY27. As such a larger-than-anticipated fiscal package would be the most direct route to deficits exceeding these projections.
Takaichi, meanwhile, has framed her approach as both proactive and responsible, but the policy mix she issues is likely to tilt towards tax relief and growth-oriented investment, reflecting voter unease over persistent inflation and long-term subdued income growth. A central campaign pledge by the LDP was a two-year suspension of the consumption tax on food, which is estimated to cost roughly 0.7% of GDP annually. In addition, higher public investment in high-technology sectors is expected to form a key plank of the government’s growth strategy, aimed at raising Japan’s long-term potential output and helping the nation keep pace with other tech leaders in the region.
The supermajority also alters previous coalition dynamics. With commanding numbers in the Lower House, the LDP is now much less dependent on concessions to its coalition partner and / or to any opposition parties. That new found autonomy could, in principle, temper certain fiscal risks if the leadership chooses to resist additional spending demands, Fitch adds. At the same time, the absence of any meaningful parliamentary obstacles increases the scope for more ambitious stimulus. The eventual scale of expansion will thus depend on a detailed policy framework set out by the new government in the coming months.
Market discipline, however, may yet act as a constraint the report suggests. Government bond yields have been edging higher amid more entrenched inflation and rising policy rates. A sustained increase in yields would therefore raise the cost of debt-financed stimulus and could potentially narrow any political room for manoeuvre. This would in turn limit either the size or duration of new measures.
Even under Fitch’s baseline of wider deficits, Japan’s debt dynamics continue to remain supported by nominal GDP growth. The fiscal position has improved markedly in recent years, as narrower deficits and stronger nominal expansion reduced government debt to just shy of 200% of GDP in FY25; down from 222% in FY20. As such, in the absence of any substantial new fiscal packages, the agency expects the debt ratio to fall further to around 195% over the next five years.
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