Japan’s government, led by Prime Minister Sanae Takaichi, authorized a historic JPY 122.3 trillion budget for the coming fiscal year, marking the largest ever and reflecting efforts to balance stimulus ambitions with caution over swelling debt levels.
The cabinet’s draft, endorsed Friday, also limits new bond issuance to just a modest increase—from JPY 28.6 trillion to JPY 29.6 trillion—helping reduce the debt dependence ratio to 24.2%, its lowest point since 1998.
This cautious approach comes amid mounting government bond yields and persistent weakness in the yen, as Takaichi’s administration tries to reassure markets it will avoid risky borrowing or tax cuts.
For the fiscal year beginning in April, the administration is targeting rising tax revenues, expected to rise by 7.6% to a record JPY 83.7 trillion, to help finance heightened outlays. Still, expanding revenue will not fully counteract the impact of sharply higher costs for debt servicing, social welfare, and defense.
Debt-servicing obligations, encompassing interest payments and redemptions, are set to climb 10.8% to JPY 31.3 trillion. This jump is underpinned by an assumed interest rate of 3.0%, the highest in nearly three decades, after the Bank of Japan’s shift away from ultra-loose monetary policy.
Japan, already carrying a debt load exceeding twice the size of its economy—the largest among developed nations—remains vulnerable to fluctuations in borrowing costs. This environment adds complexity to Prime Minister Takaichi’s strategy to pursue active fiscal stimulus.
In a policy shift, the prime minister intends to scrap the annual primary budget balance as the country’s main fiscal consolidation indicator. Instead, Takaichi plans to establish a multi-year fiscal target designed to enable greater spending flexibility.
