Japan’s government agencies have put forward budget requests amounting to 143.1 trillion yen ($917.8 billion) for the upcoming fiscal year, edging planned expenditure towards the levels seen during the COVID-19 pandemic. This increase aligns with Prime Minister Sanae Takaichi’s expansionary fiscal strategy, which emphasizes investment in strategic sectors such as artificial intelligence, semiconductors, and economic security.
A notable portion of the budget, 12.2 trillion yen, is earmarked for a new strategic investment program. Furthermore, defense spending is poised for potential increases as the government reassesses its defense strategy, although several requested items have yet to receive specific budget allocations.
The rise in borrowing costs is exerting additional pressure on Japan’s financial situation. The Finance Ministry has adjusted its assumed interest rate from 3.0% to 3.8% in response to the 10-year government bond yield reaching 3%, the highest it has been since 1996. Consequently, requests for debt-servicing costs, which encompass interest payments and debt redemption, have climbed to a record 36.64 trillion yen, marking an increase of 5.36 trillion yen compared to the current fiscal year.
Scrutiny is expected over the size of new government bond issuance in the fiscal 2027 budget. Prime Minister Takaichi has expressed the government’s intention to cap new bond issuance at approximately 40 trillion yen while continuing to work on reducing the debt-to-GDP ratio. Balancing the need for increased investment in growth sectors with fiscal responsibility remains a significant challenge for the government, particularly as rising interest rates elevate the cost of servicing Japan’s substantial public debt.