Japan is all set to release its largest-ever initial budget, this shows an aggressive fiscal stance as inflation persists and spending pressures mount across social security and defense.
Prime Minister Sanae Takaichi said on Thursday that the government plans to allocate ¥122.3 trillion ($786 billion) for the fiscal year beginning in April 2026.
Debt issuance to rise
To finance the expanded spending, the government plans to raise around ¥29.6 trillion through new issuance of government bonds. Regardless of the increase, the share of the budget funded by debt is expected to decline marginally. The reliance on bond issuance will fall to 24.2%, down from 24.9% in the current fiscal year, Takaichi said.
This is a 6.3% increase from the ¥115.2 trillion budgeted for the current fiscal year and represents the highest initial budget on record. The Cabinet is expected to approve the draft as early as Friday, according to people familiar with the matter.
“I believe this budget strikes a balance between strengthening the economy and ensuring fiscal sustainability,” the prime minister said at the end of a meeting with ruling parties and government members.
Markets watch closely
Investors have been closely monitoring the size of the upcoming budget amid concerns over Takaichi’s fiscally expansive approach. Japan already carries the largest public debt burden among advanced economies, raising fears that excessive spending could push long-term government bond yields higher.
“The size of the initial budget is a record, which is negative for yields,” said Koji Takeuchi, Senior Research Fellow at Itochu Research Institute to Bloomberg. “At the same time however, government bond issuance has been kept in check.” He added that long-term bond issuance is not expected to increase and that mid-to-long-term issuance could even decline.
Spending growth outpaces inflation
The sharp rise in spending comes as inflation continues to weigh on households and public finances. Japan’s key price measure has remained at or above 2% for more than three years, driven by rising costs of everyday necessities. Even so, the growth in budget outlays far exceeds the inflation rate, reflecting mounting demographic pressures.
A major driver of the record budget is rising social security spending, which is set to increase to ¥39.1 trillion, up from ¥38.3 trillion in the current fiscal year, according to documents seen by Bloomberg. Defense spending is also climbing, with about ¥8.8 trillion expected to be allocated to the government’s defense buildup program amid growing geopolitical tensions.
In addition, local allocation tax grants are projected to rise to around ¥21 trillion, compared with roughly ¥18.9 trillion in fiscal 2025. Budget reserves are expected to total about ¥1 trillion. Rising interest rates are significantly increasing the cost of servicing Japan’s debt. The government plans to earmark about ¥31 trillion for bond-related costs, including redemptions and interest payments.vThis will exceed the current record of approximately ¥28.22 trillion in the initial budget for fiscal 2025.
The Finance Ministry is expected to set the provisional interest rate used for calculating debt-servicing costs at 3%, the highest level since 1997, according to people familiar with the matter. On the revenue side, stronger corporate earnings and inflation are expected to lift tax receipts. The government projects tax revenue of roughly ¥83.7 trillion to ¥84 trillion for the next fiscal year, up from about ¥77.82 trillion in the initial budget for fiscal 2025.
“Tax revenues have been fairly solid, which likely helped Takaichi with addressing market concerns,” Takeuchi said. “Still, if the government wants to curb bond issuance going forward, it will need to carefully consider how to secure fiscal resources as well.” Earlier this week, Finance Minister Satsuki Katayama acknowledged that fiscal health could worsen in the short term as the government prioritizes growth.
After holding talks with Takaichi on Monday, Katayama defended the scale of the budget, saying, “At a time when the nation has almost exited from deflation and there is an inflationary trend, it is not usual for the government budget to decrease. It is only natural that the amount would be the highest ever.”