Japan's 130 trillion yen budget request risks deeper debt spiral

Japan's ministries and agencies are seeking more than 130 trillion yen ($819 billion) in budget requests for fiscal 2027, a record that exceeds this year's 122 trillion yen and threatens to force new debt issuance as tax revenue lags spending.

"The predetermined request limits known as 'ceilings' will not be imposed," Sanae Takaichi, Japan's prime minister, said, aiming to promote economic growth and strengthen national security through a new growth investment framework.

The Defense Ministry is requesting a record 8.9 trillion yen to deploy interceptor drones and accelerate Japan's defense buildup, while the Ministry of Economy, Trade and Industry is seeking around 7.7 trillion yen including special account spending, with some 4.5 trillion yen planned for growth investment in artificial intelligence and semiconductors. The education ministry is asking for around 8.7 trillion yen, up 2.8 trillion yen from the previous year, and the Foreign Ministry will likely ask for 1.2 trillion yen, up from 870 billion yen, to expand official development assistance.

With tax revenue for fiscal 2026 forecast at 83 trillion yen, requests totaling over 130 trillion yen will likely lead to new debt issuance, dealing a further blow to Japan's fiscal health, already the worst among advanced economies. Government bond yields have trended higher on expectations the Bank of Japan will keep raising rates after lifting its key policy rate to a 31-year high of 1.0 percent in June, and the Finance Ministry is expected to set the assumed interest rate for calculating payments at 3.8 percent for fiscal 2027, up from 3.0 percent.

Debt-servicing costs, covering interest on existing bonds and redemptions, are expected to exceed the 31.3 trillion yen the government earmarked in the fiscal 2026 budget, the sources said. Social security expenditures such as pension and medical costs are expected to increase around 390 billion yen from the previous year, reflecting the continued aging of the population.

Fiscal math tightens as rates climb

The widening gap between spending requests and tax revenue comes as Japan's debt-servicing burden rises. The last time budget requests exceeded 120 trillion yen was this fiscal year, when they hit 122 trillion yen, and the initial budget ultimately swelled further once supplementary spending was added. Defense spending reached about 11 trillion yen in fiscal 2025, including related expenditures, equivalent to 2 percent of gross domestic product — a target achieved ahead of schedule under Takaichi's administration.

Higher JGB yields raise the cost of servicing Japan's debt, which at roughly 230 percent of GDP is the heaviest among advanced economies. Rising yields also pressure the yen and weigh on Japanese equities as investors demand a higher risk premium for holding the country's assets, complicating the Bank of Japan's path toward further policy normalization.

Defense buildup accelerates

The Defense Ministry's 8.9 trillion yen request marks the largest ever in an initial budget request, and the figure is expected to balloon before the end of the year as revisions to Japan's three key national security documents are scheduled for later this year. The request includes funding for attack drones for the first time, a hypersonic missile launched via submarine, and an AI-powered system to support decision-making at the Joint Operations Command.

U.S. President Donald Trump's administration has called on allied nations to spend 3.5 percent of their GDP on defense, and discussions within the Japanese government over further increases in defense spending are expected to intensify from autumn. A senior official of the Liberal Democratic Party's security research commission said it is certain the amount will exceed 10 trillion yen in the initial budget proposal.

Ministries and agencies face a deadline at the end of this month to submit budget requests ahead of the Finance Ministry's compilation of the budget by the end of this year. The draft budget could swell from the amount initially requested, given that spending will not be finalized for many items until negotiations conclude.

This article is for informational purposes only and does not constitute investment advice.