Private-sector council proposes use of forex surplus to cover fiscal measures

Private-sector members of a key government council have proposed active use of surpluses in the state’s foreign exchange special account as financial resources to cover massive fiscal needs.

The proposal was presented at Thursday’s meeting of the Council on Economic and Fiscal Policy (CEFP), headed by Prime Minister Sanae Takaichi.

CEFP members discussed concrete measures to thoroughly reform state budget compilation at a time when the government needs to secure a massive amount of funds for projects such as investments to make the country resilient and prosperous under the Takaichi administration’s growth strategy.

Funds are also needed for the government’s plans to cut the consumption tax rate on food from 8% to 1% for two years from April 2027 as a measure to fight inflation, and to strengthen the country’s defense capabilities.

In recent years, surpluses at the foreign exchange special account, which manages funds for currency market intervention, have reached about ¥5 trillion ($31.7 billion) annually thanks to increases in the yen value of foreign currency-denominated assets due to the depreciation of the Japanese currency, and in interest revenue reflecting higher interest rates overseas.

The Finance Ministry has a rule to set aside about 30% of such surpluses and transfer the rest to the government’s general and other accounts in principle in order to prevent fund shortages at the foreign exchange account because of factors such as rapid fluctuations in foreign exchange and interest rates.

The ministry sets aside surpluses so that the proportion of accumulated surpluses to government-held foreign assets stands at about 30%. At the end of fiscal 2024, the cumulative balance of surpluses stood at ¥30.2 trillion, with the proportion coming to 22.4%.

Private-sector members of the CEFP called on the government to adopt as a benchmark the difference between assets and debts including short-term government securities issued to raise yen funds for foreign exchange market intervention.

Given that the gap totaled ¥85.8 trillion at the end of fiscal 2024 and that the proportion to foreign currency-denominated assets topped 40%, the members stressed that sufficient fiscal buffers for foreign exchange-related risks have been secured for the time being based on the current exchange rate levels, urging the government to actively use surpluses at the foreign exchange special account.

On the compilation of the government’s fiscal 2027 budget, the private-sector members called for clarifying “as much as possible” not only budgetary measures for public-private investments for the first year but also the scale and time frame of fiscal measures, and specific ways of providing support for later years.