Prime Minister Sanae Takaichi told the Council on Economic and Fiscal Policy on Wednesday morning that her government would establish a new investment quota for seventeen strategic growth sectors, including artificial intelligence, semiconductors, hydrogen, fusion, advanced biotech and battery materials, and exempt them from the rule that limits the financing of public project funds to three years. The change is the most consequential shift in Japan's industrial policy framework since the early 2000s.
The seventeen-sector list, prepared by the Ministry of Economy, Trade and Industry over the past two months, mirrors strategic-sector designations in the European Union's Critical Raw Materials Act and the United States' CHIPS Act, but Japan's framework attaches direct fiscal commitments rather than tax credits. Initial estimates from the finance ministry put the additional multi-year budgetary headroom at roughly 5.6 trillion yen over the next four fiscal years.
Takaichi's signal that the government may ease its commitment to the primary balance target — which the Cabinet had projected would deliver Japan's first primary surplus since 1998 in fiscal 2026 — has rattled the Japanese government bond market. The ten-year JGB yield touched a fresh sixteen-year high of 1.94 per cent on Wednesday, and the yen weakened beyond 161 against the dollar before recovering modestly on Bank of Japan-related headlines.
The prime minister has framed the shift as a response to what her office calls "the new economic security environment," a reference to the disruption caused by the Iran war, the volatility in Strait of Hormuz shipping and the broader competitive dynamic with China in advanced technology. Finance minister Hayashi Yoshimasa said the government remained committed to "fiscal sustainability over the medium term" but conceded that the three-year project rule had "ceased to fit the structure of strategic investment."
Markets are now watching how the Bank of Japan handles its September meeting. Governor Kazuo Ueda, who has so far raised the policy rate to 0.75 per cent in line with the bank's gradual normalisation path, declined to comment on the Takaichi quota plan during a Diet appearance on Tuesday but acknowledged that the bond market was "in a different regime" than at the start of the year.
The political path remains uncertain. Takaichi's coalition with the centrist Democratic Party for the People holds a working majority in the lower house but a narrower one in the upper house, where a vote on the supplementary budget that contains the new sectoral framework is scheduled for early July. The opposition Constitutional Democratic Party has signalled it will support the broad direction but oppose the suspension of the primary balance commitment.