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Japan’s government, led by Prime Minister Sanae Takaichi, has approved a record-breaking budget worth 122.3 trillion yen ($785 billion) for the next fiscal year starting in April, underscoring its attempt to balance proactive fiscal spending with growing concerns over national debt. The budget, which will be submitted to parliament early next year, surpasses the current fiscal year’s initial budget of 115.2 trillion yen and reflects rising pressures from inflation, social welfare demands, and defence spending.
Despite the historic size of the budget, the Takaichi administration has moved to reassure investors by limiting new government bond issuance. New bond sales will rise only modestly to 29.6 trillion yen from this year’s 28.6 trillion yen, while the debt dependence ratio will fall to 24.2%, the lowest level since 1998. This approach is aimed at calming markets amid rising Japanese government bond yields and a persistently weak yen.
Higher tax revenues are expected to play a crucial role in funding the expanded budget. Government projections show tax income rising 7.6% to a record 83.7 trillion yen, providing some relief as Japan faces sharply increasing debt-servicing costs. However, these revenues will not fully offset higher spending pressures, particularly in social security, defence, and interest payments.
Debt-servicing costs alone are projected to jump 10.8% to 31.3 trillion yen, reflecting the impact of higher interest rates as the Bank of Japan moves away from its long-standing ultra-loose monetary policy. The assumed interest rate for the new budget is set at 3.0%, the highest level in 29 years.
Japan continues to carry the heaviest debt burden among developed economies, with public debt exceeding twice the size of its economy. This makes fiscal policy highly sensitive to rising borrowing costs and complicates Prime Minister Takaichi’s plans for aggressive stimulus. To gain more flexibility, she plans to abandon the traditional primary budget balance as a consolidation target and replace it with a multi-year fiscal goal, allowing for sustained but controlled government spending.
