Prime Minister Sanae Takaichi’s administration is set to finalize a record-breaking 122.3 trillion yen ($824 billion) budget for the next fiscal year. The plan, centered on “proactive” spending, signals a shift in Japan’s economic strategy as it attempts to balance growth with mounting debt costs.
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- New Debt: Japan will issue 29.6 trillion yen ($189.5 billion) in new government bonds, an increase over the current year’s borrowing.
- Tax Revenue: Despite tax collections hitting a record 83.7 trillion yen, the gap between income and spending remains wide.
- Primary Deficit: The budget underscores a move away from the government’s previous goal of restoring fiscal health by a specific deadline.
Major Spending Drivers
The record budget size is being fueled by three primary factors:
- Social Welfare: Rising costs to support Japan’s rapidly aging population.
- Defense: Significant increases to meet regional security challenges.
- Debt Servicing: As global and domestic interest rates rise, the cost of paying back existing debt is becoming more expensive.
Market Impact & Economic Friction
The plan for increased debt has rattled bond markets. On Wednesday, the yield on 30-year government bonds climbed to 3.45%, a new record high.
Investors are concerned about a “debt oversupply,” where the government issues more bonds than the market can comfortably absorb without driving interest rates even higher.
The “Takaichi” Balance
Since taking office in October, PM Takaichi has faced a difficult balancing act:
- The Goal: Use aggressive spending to “revitalize” the economy and help households manage the rising cost of living.
- The Reality: High bond yields and a high debt-to-GDP ratio have forced the administration to tone down its rhetoric. Takaichi recently told the Nikkei that the government will avoid “irresponsible” debt issuance or tax cuts that could destabilize the economy.
