Japan relaunches DOGE-style review to fund Takaichi pledges as bond yields rise

The initiative is intended to reassure bond investors as much as it is to tighten the budget, because anxieties about how Takaichi's commitments will be financed have driven 10-year JGB yields to levels not seen in decades. If credible savings are found that keep new bond issuance near 40 trillion yen, some of the fiscal risk premium in long-term JGBs could ease, offering limited support for the yen. Yet the first review yielded only modest results, suggesting markets will hold out for firm figures from year-end budget talks before they award the government any credit. A record 143 trillion yen in budget requests highlights how large the funding shortfall could be.

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Japan's initial efficiency exercise identified just three tax breaks to abolish out of 120, prompting Takaichi to search the government's unspent resources for cash before the bond market runs out of patience.

On Friday, the Japanese government announced it would relaunch a spending review, broadening its probe to include tens of billions of dollars in public funds and subsidies as it looks for ways to finance the costly policy promises of Prime Minister Sanae Takaichi, according to Reuters.

The initiative is part of Japan's DOGE programme, which takes its name and inspiration from the US Department of Government Efficiency. Earlier this year, the first round examined special tax measures but produced minimal results: ministries looked at roughly 120 tax breaks and recommended scrapping just three. That underwhelming outcome has increased the pressure on the government to adopt a more rigorous approach as it seeks funding for a planned reduction in the consumption tax on food from April 2027, while also facing growing demands for defence and industrial policy spending.

This time the review is trained on Japan's 201 special-purpose government funds, which together are forecast to hold around 7 trillion yen, or roughly $44 billion, by the close of the next fiscal year. The plan aims to return idle or long-dormant money to the national treasury and impose stricter cost-benefit checks on subsidy programmes through the use of external experts and evidence-based policymaking. A government source told Reuters that Takaichi holds high expectations for the review as a significant source of new revenue, given the scale of the funds.

The effort comes as the benchmark 10-year Japanese government bond yield trades at multi-decade highs, fuelled by worries that Takaichi's spending plans could necessitate more debt issuance and put further strain on public finances. Takaichi, eager to shed her reputation as a reflationist who favours heavy fiscal stimulus, has committed to keeping new debt issuance at around 40 trillion yen, even though next year's budget requests have climbed to a record 143 trillion yen.

Not everyone believes the approach is the correct one. An economist at a Japanese research institute cautioned that directing money from funds and subsidies to finance a consumption tax cut risks diverting resources away from supply-side investment and toward demand stimulus, and argued that funnelling fiscal resources into investment would do more to support growth while adding less to inflation.

The results of the review are expected to feed into year-end tax reform discussions and budget negotiations, during which the government will face pressure to demonstrate how it intends to pay for its commitments while retaining the confidence of bond investors.