Here are developments in Japanese national politics as of the weekend:

The Takaichi government is moving forward with a supplemental budget but faces some choices.

The LDP’s new study group aimed at supporting Prime Minister Takaichi Sanae attracted most of the party’s lawmakers, suggesting limited utility as a base for the prime minister.

The leaders of the LDP’s defense panel endorse not including a firm budget target in its recommendations to the government.

Takaichi’s choices on supplemental budget

The Takaichi government is now firmly committed to introducing a supplemental budget to the Diet in June, ahead of the end of the legislative session in July.

The government is determined to limit the size and focus of the budget. It has indicated that its intention will be a JPY3 trillion budget aimed at shoring up the government’s reserves as it continues providing fuel subsidies and plans to spend JPY500 billion on utility subsidies over the summer.

However, Ishin no Kai, the junior governing party, and opposition parties want the government to provide some economic stimulus amid signs that consumer sentiment is softening.

Despite Prime Minister Takaichi’s commitment to “responsible fiscal expansion” – or because of it, insofar as she wants to deploy fiscal resources on her strategic priorities instead of on short-term stimulus – the government may point to rising bond yields as an argument against these demands.

At the same time, Takaichi’s Friday meeting with Bank of Japan (BOJ) Governor Kazuo Ueda, her first one-on-one meeting with Ueda since February, could point to greater tolerance from the prime minister for another BOJ rate hike – to try to contain inflation that could be creeping up notwithstanding April data that showed inflation running below the BOJ’s 2% inflation target.

In April, inflation appears to have been contained both by fuel subsidies – subsidies that senior Liberal Democratic Party (LDP) officials are arguing cannot continue at an “unrealistic and unsustainable” level – and the newly introduced subsidies for secondary education and school lunches.

Ultimately, the prime minister now has to find a balance between containing inflation and supporting demand and managing the economic shock in the immediate term versus pursuing her longer-term ambitions – all while avoiding steps that might fuel further rises in bond yields.

Takaichi will explain her thinking about a supplemental budget on Monday, May 25.

Takaichi study group attracts most of LDP

The first meeting of the National Power Research Association, the LDP study group organized by Taro Aso and other senior LDP lawmakers to promote Takaichi’s policy agenda, was held on Thursday, May 21. It featured an address by US Ambassador George Glass.

While there has been plenty of speculation about Aso’s intentions in pushing the group’s formation, the fact that 347 LDP lawmakers attended the first meeting diminished the effect somewhat.

After all, 347 lawmakers is more than 80% of the party’s lawmakers, with even some of her intra-party opponents like former prime minister Fumio Kishida in attendance.

It seems that only her most recalcitrant opponents like former prime minister Shigeru Ishiba and his ally Seiichiro Murakami – who referred to the meeting as akin to the wartime “Imperial Rule Assistance Association” (into which prewar parties were dissolved) – stayed away.

But enthusiasm in the meeting itself was “not high,” with one participant describing it as being more like a formal party meetings of lawmakers

The robust attendance suggests that LDP lawmakers do not want to be seen as overly distant from the still-popular prime minister. But a club with virtually the entire party among its members is not a dedicated movement united behind the prime minister either.

For the immediate term, Takaichi’s dinner meeting Friday evening with leaders of the LDP’s upper house caucus may be more significant for her ability to manage the party, insofar as it suggests she has taken seriously their anger at their advice being disregarded and is trying to mend fences.

Working closely with the LDP’s upper house leaders, who will have to work with opposition parties to hammer out the chamber’s agenda, will just be part of the job as long as the LDP lacks a majority in the House of Councilors.

Leaders of LDP defense panel approve no budget target

The leadership of the LDP national security panel preparing recommendations for the Takaichi government’s revision of the three national security documents approved a draft of the party proposal that did not include a concrete target for raising defense spending.

The LDP draft refers to “securing a budget for transforming defense capabilities within five years.”

The draft’s omission of a concrete target for the next mid-term defense plan points to an undercurrent of concern within the LDP that promising higher defense spending without securing a solid fiscal base for larger defense budgets could have serious consequences.

Whether or not the Takaichi government ultimately sticks to the formula, this suggests that, as the LDP learned when the Kishida government set a 2% of GDP target in 2022, the political economy of defense spending is sensitive and divisive and may be even more so now that interest rates have climbed.

Aside from the defense spending question, the LDP draft focuses heavily on the development and deployment of unmanned vehicles and the strengthening of Japan’s defense industrial base.

The LDP panel as a whole will debate the draft on 25 May ahead of final submission to the government in June.

This article is republished with permission from Tobias Harris’s newsletter Observing Japan.