Just under a month after Japanese Prime Minister Sanae Takaichi announced the country was on track to achieve its first primary budget surplus in 28 years, the latest official projections reveal that her recently introduced economic stimulus package has already derailed this objective. A new mid-to-long-term economic outlook report released by Japan's Cabinet Office this Thursday indicates that the primary budget balance, which excludes public debt interest costs, is projected to record a deficit of approximately 800 billion yen (about $5.1 billion) in the new fiscal year starting in April, equivalent to 0.1% of GDP. While this represents the smallest deficit since Japan established this fiscal target in 2001, the government's baseline scenario from last August had forecast a surplus of 3.6 trillion yen for the same fiscal year. It is noteworthy that the statistical scope for the primary budget balance used by the Cabinet Office this time is broader than the metric referenced by Prime Minister Takaichi last December. The Prime Minister had previously cited figures based primarily on the initial annual budget, whereas the Cabinet Office's broader data encompasses not only the initial budget but also supplementary spending within the fiscal year, incorporating expenditures from both central and local governments and other public funds. Achieving a balanced primary budget under this broader scope has long been a core fiscal target for Japan. However, Prime Minister Takaichi has recently downplayed this goal, shifting the focus instead to reducing the public debt-to-GDP ratio as a primary objective. In fact, even for this broader metric, the short-term projection had already shifted from a surplus to a deficit last year. Although the narrower metric-based surplus target proclaimed by Takaichi can still be achieved, this outcome significantly deviates from Japan's decades-long commitment to the broader surplus target. Against a backdrop of heightened investor scrutiny of Japan's fiscal health, this discrepancy may substantially undermine the government's professed image of "responsible fiscal management." Earlier this week, a sharp spike in long-term Japanese government bond yields rippled through global markets, partly fueled by investor concerns over the trajectory of Japan's debt. Prime Minister Takaichi's campaign pledge for the February 8 snap election, which promises a temporary reduction of the food consumption tax to zero, has further amplified market anxieties. Notably, the yield on Japan's 40-year government bonds breached 4%, reaching a record high since their issuance in 2007 and marking the first time in over three decades that yields on sovereign bonds of various maturities have surpassed this threshold. Yields on 30-year and 40-year bonds surged by more than 25 basis points, the largest increase since the "Tax Liberation Day" tariff policies implemented by the Trump administration last April. The market volatility prompted Japan's Finance Minister, Tsukasa Katayama, to call for calm among market participants on Tuesday, a sentiment echoed by U.S. Treasury Secretary Janet Yellen during a conversation with Katayama the same day. Although Japanese bond yields have since retreated from their peaks, investors remain skeptical about the government's ability to reinstate the current consumption tax rate after the proposed reduction. After finalizing a record initial budget for fiscal year 2026 last month, Prime Minister Takaichi cited data from the Ministry of Finance projecting a surplus of 1.34 trillion yen for the primary budget balance under the narrower scope for that fiscal year. Both Takaichi and Finance Minister Katayama have repeatedly referenced this narrower figure to defend the government's expansionary fiscal policies, asserting their "fiscal sustainability," yet this metric does not fully capture Japan's overall fiscal picture. The fiscal deficit under the broader scope primarily stems from two expenditure categories: first, the 5.2 trillion yen in new spending associated with the implementation of Prime Minister Takaichi's economic stimulus package announced last year, scheduled for fiscal 2026; second, a 1.2 trillion yen increase in local government expenditures, which includes rising labor costs. According to Ministry of Finance estimates, Takaichi's proposed tax cuts would incur an annual fiscal cost of approximately 5 trillion yen, an expense not yet reflected in the Cabinet Office's latest primary balance projections. Nevertheless, the current projections indicate that the debt-to-GDP ratio, the metric Prime Minister Takaichi prioritizes, is expected to maintain a downward trend in the coming years.