Odd Lots · Thursday, August 6, 2026
Contrary to fears of fiscal dominance, Brad Setser argues that Japan's fiscal position has objectively improved, with its primary balance trending towards surplus, outperforming several G7 economies including the US. While interest burdens will rise with higher rates, Japan's large foreign asset holdings and manageable debt dynamics prevent a crisis scenario.
“What has changed, certainly compared to twenty fourteen, even compared to twenty sixteen, is that the primary balance, so excluding interests, government revenues relative to expenditures, is now in balance. It's now flat. There's no primary deficit. That makes Japan one of the better G seven economy, certainly better in the United States, certainly better than the UK, certainly better than France. I think better than Germany now too.”
“I think what has gotten people nervous is Takeichi doesn't want, at a minimum, to get a bigger surplus. She's pushing back against the moths plans. She may want to go back to a modest primary, and she expresses this in a way that generates a lot of anks. But the underlining fiscal performance of Japan. Stack up Japan using the IMF fiscal monitor variables against the US, and then compare that to the rhetoric that is tossed around, and I would say there's a very big gap.”