Foreign Exchange Fund Special Account Surplus to Fund Consumption Tax Cut, FILP Bonds for Increased Defense Spending

The report analyzes recent government proposals to use Foreign Exchange Fund Special Account surpluses for tax cuts and Fiscal Investment and Loan Program (FILP) bonds for defense spending. It warns that these measures may face significant implementation hurdles and could ultimately trigger upward pressure on JGB yields.

Key Takeaways

• 1.Proposals to use the Foreign Exchange Fund Special Account (FEFSA) to fund a consumption tax cut are unlikely to succeed given precedent and earmarked priorities.
• 2.Using the Fiscal Investment and Loan Program (FILP) for defense spending is being debated, but could face pushback regarding the suitability of FILP for such projects.
• 3.Market participants remain wary of potential upward pressure on JGB yields due to deteriorating supply/demand dynamics from increased issuance.

Table of Contents

• Using the Foreign Exchange Fund Special Account to fund a consumption tax cut for food
• Using the Fiscal Investment and Loan Program to fund increased defense spending
• Putting everything in initial fiscal year budgets