An advisory panel on Japan's fiscal policy urged the government on Tuesday to find ways of securing stable funding sources to achieve a planned increase in defense spending while avoiding putting off necessary cost-sharing measures into the future.
The Fiscal System Council, whose members include professors and corporate executives, said that an unprecedented review of fiscal steps in terms of both spending and revenue policy is required if the government seeks to boost defense expenditure in what would be a fundamental shift in approach that the panel describes as a "historic turning point."
Prime Minister Fumio Kishida has urged his defense and finance ministers to aim for an increase in defense spending so it can account for 2 percent of gross domestic product in fiscal 2027, in a break from the roughly 1 percent cap that has been in place for decades.
China's growing assertiveness, missile and nuclear threats from North Korea, and Russia's aggression in Ukraine have prompted calls for debt-ridden Japan, which has maintained an exclusively self-defense-oriented policy, to bolster its defense capabilities.
The 2 percent defense spending target is on par with that of North Atlantic Treaty Organization members.
"Defense spending includes recurring costs because defense equipment needs to be maintained. It is necessary to secure stable funding sources accompanied by spending reform, without postponing burden-sharing," the panel said in a report submitted to Finance Minister Shunichi Suzuki.
The drafting of the defense budget for the next fiscal year from April culminates in December after the government reviews key documents on Japan's defense and security. The existing five-year defense buildup plan puts necessary funding at around 27.5 trillion yen ($198 billion) over the period, with 5.4 trillion yen earmarked in the fiscal 2022 budget.
"If the amount increases substantially beyond 30 trillion yen, this, in and of itself, will be a historic turning point. That being the case, what is required is not an extension of the past but a consideration of fiscal steps in terms of expenditure and revenue," the proposal said.
With debt standing at more than twice the size of the economy, Japan's fiscal health is already the worst among advanced economies meaning securing funding sources is no easy task. Kishida has said a decision will be made before year-end, with raising tax rates seen as an option to increase defense spending.
The council cited Britain as a cautionary tale, which was recently hit by a sell-off in government bonds and its currency, the pound, after proposed drastic tax cuts roiled markets and shook investor confidence.
Japan is unlikely to face a similar fate, given that the foreign ownership of Japanese government bonds is low, among other factors, the council said. But it added, "It's critical that Japan guides fiscal policy responsibly without causing market distrust by learning from recent economic turmoil in Britain."