Japan's government, led by Prime Minister Sanae Takaichi, has announced its largest-ever initial budget for the fiscal year starting April 2026. The general-account budget totals ¥122.3 trillion, marking a 6.3% increase from the previous year's ¥115.2 trillion. To fund this expansion, the government plans to issue ¥29.6 trillion in new bonds, though the share of debt financing will slightly decrease to 24.2% from 24.9%.
Prime Minister Takaichi stated the budget aims to "strike a balance between strengthening the economy and ensuring fiscal sustainability." However, the announcement comes as Japan grapples with the world's heaviest public debt burden. Senior research fellow Koji Takeuchi of the Itochu Research Institute noted the record size is "negative for yields," adding to pressure on longer-term bond yields which have been rising this year.
The spending increase is driven by persistent inflation above 2% for over three years, rising social security costs tied to an aging population (increasing from ¥38.3 trillion to ¥39.1 trillion), and heightened defense spending due to regional geopolitical tensions. Finance Minister Satsuki Katayama acknowledged the plan could strain fiscal health in the short term but deemed it necessary for future growth.
Concurrently, Bank of Japan Governor Kazuo Ueda signaled growing confidence in achieving the 2% inflation target, stating the goal is "steadily approaching." His comments follow a recent BOJ rate hike to the highest level since 1995, with traders anticipating further increases. Ueda indicated the bank would raise rates again if the economy stays on track, with market watchers expecting a potential hike every six months starting next year.
The Finance Ministry plans to use a 3% interest rate for debt servicing in FY2026, the highest level since 1997. While tax revenue is projected at a robust ¥83.7 trillion, analysts warn the government must find better ways to secure cash if it aims to reduce future bond sales.
