Ministry of Finance
(Bloomberg) — Japanese Prime Minister Sanae Takaichi’s government plans to unveil a record initial budget for the fiscal year starting in April, increasing outlays at a faster pace than inflation.
The budget for the year beginning April 2026 will total about ¥122.3 trillion ($786 billion), Takaichi said on Thursday. That represents an increase of roughly 6.3% from the ¥115.2 trillion allocated for the current fiscal year, marking the largest initial budget on record.
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To help finance the spending, the government plans to raise around ¥29.6 trillion through new issuance of government bonds, Takaichi said. The budget’s reliance on debt issuance will fall to 24.2%, down from 24.9% for the current year, she added.
“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.
Investors have been closely watching how much Takaichi decides to spend in the upcoming fiscal year, with concerns simmering over her fiscally expansive stance. Given Japan is the most heavily debt-laden advanced economies, too much aggression in fiscal spending could further push up longer-term yields that have been on a rising trend this year.
“The size of the initial budget is a record, which is negative for yields,” said Koji Takeuchi, Senior Research Fellow at Itochu Research Institute. “At the same time however, government bond issuance has been kept in check,” he added, referring to reports saying that long-term bond issuance won’t be increasing and mid-to-long term issuance could even decline.
The record budget size also comes as costs across the economy continue to rise amid persistent inflation. Japan’s key price measure has remained at or above 2% for more than three years, reflecting a jump in the price of a broad number of daily necessities.
Still, the increase in the budget was far larger than the inflation rate, as Japan faces growing demand for social security spending amid an aging population. Social security outlays will rise to ¥39.1 trillion from ¥38.3 trillion in the current fiscal year, according to a document seen by Bloomberg. Higher defense spending has also pushed up overall budget needs, reflecting demographic pressures and rising geopolitical tensions.
The large initial budget also mirrors Takaichi’s willingness to deploy fiscal support to shore up economic growth. Last month her administration rolled out the biggest economic package since pandemic restrictions were eased, featuring measures to help alleviate the pain from rising prices and fund a defense buildup.
While Takaichi has repeatedly stressed that her fiscal policy will remain “responsible” while also being expansionary, earlier this week Finance Minister Satsuki Katayama admitted that there could be a short term worsening of fiscal health to drive future growth.
So far reports of next year’s fiscal budget size appear to have had limited impact on the market.
The initial budget also includes debt-servicing costs, which are swelling as yields rise. The Finance Ministry plans to set the provisional interest rate used for calculating that cost for next fiscal year at 3%, the highest level since 1997, according to people familiar with the matter.
In addition to fresh bond issuance, tax receipts will be key to fund the budget. The projected taxation revenue for next year will be roughly ¥83.7 trillion, Takaichi said.
“Tax revenues have been fairly solid, which likely helped Takaichi with addressing market concerns,” said Takeuchi. “Still, if the government wants to curb bond issuance going forward, it will need to carefully consider how to secure fiscal resources as well.”
(Updates with economist comments and additional background.)
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