By Leika Kihara
TOKYO, June 30 (Reuters) - Japan will overhaul its budget process to more flexibly boost investment in growth areas and respond to crises, Prime Minister Sanae Takaichi's first economic blueprint showed on Tuesday, underscoring her administration's focus on reviving the economy.
While the blueprint repeatedly stressed the need to ensure Japan maintains market trust in its finances, Takaichi will face the challenge of funding her spending plans without adding too much to Japan's already
huge debt pile.
"Reflecting rising inflation and wages, Japan will overhaul the way it crafts the budget to one better suited to strengthen growth potential and expand the size of its nominal economy," the blueprint said, signalling its resolve to tap rising nominal tax revenues from inflation to finance spending plans.
Since taking office in October, Takaichi has pledged to pursue a "responsible, proactive fiscal policy" that focuses on addressing what she describes as decades of under-investment that eroded Japan's economy and global competitiveness.
The focus on big spending and a lack of clarity on the funding have pushed up bond yields as investors fret about the impact on Japan's already tattered finances.
Aside from the annual budget that sets caps for most spending items, the government will form a multi-year framework that targets spending in strategic areas, the blueprint showed.
Specifically, Japan will seek to work with the private sector to channel resources into strategic industries, with combined public and private investment projected to exceed 370 trillion yen ($2.28 trillion) through fiscal 2040, it said.
Through initiatives focused on areas such as AI, chips and space development, Japan will aim to boost gross domestic product (GDP) to nearly 1,100 trillion yen by fiscal 2040, the document showed.
"Stably lowering Japan's combined national and regional debt-to-GDP ratio is core to our policy," it said.
Japan will no longer set annual targets for achieving a primary budget surplus, and instead position it as an indicator to be managed over multiple years, the blueprint said.
A primary budget balance, which refers to the difference between total revenues and non-interest expenditures, has long been used in Japan as a fiscal reform goal.
Japan will also depart from the practice of compiling extra budgets each year by appropriating all non-emergency expenditure into the annual budget, the blueprint said.
"Even if an extra budget becomes necessary this autumn onward, it will be limited to truly high-emergency spending."
The blueprint also called on the Bank of Japan to align monetary policy with government efforts to boost growth, signalling the administration's preference for low interest rates.
($1 = 162.2300 yen)
(Reporting by Leika Kihara; Editing by Jamie Freed)
