The Cabinet approved a $783 billion (122.3 trillion yen) draft budget for the year beginning in April. The plan limits new government bond issuance and reduces the share of the budget financed by fresh debt to 24.2%, the lowest level since 1998, addressing investor concerns about Japan’s already high public debt.
Balancing Fiscal Support and Debt Restraint
Finance Minister Satsuki Katayama emphasized that the budget aims to support key policy priorities while maintaining fiscal discipline. “We believe we have been able to draft a budget that not only increases allocations for key policy measures but also takes fiscal discipline into account, achieving both a strong economy and fiscal sustainability,” she said.
The proposed spending plan keeps new bond issuance below 30 trillion yen ($190 billion) for the second consecutive year. Early market reactions suggest the government’s approach is easing investor worries: yields on 30-year Japanese government bonds (JGBs) fell from record highs after reports that super-long bond issuance would drop to a 17-year low.
Despite the cautious approach, some economists warn that political fragmentation may prompt Takaichi to approve a large supplementary budget next year, potentially reigniting market concerns over inflation and currency weakness.
Inflation and Interest Rate Pressures
Complicating fiscal policy, Tokyo’s core consumer price index—excluding volatile fresh food prices—rose 2.3% in December from a year earlier, slightly below forecasts but still above the Bank of Japan’s (BOJ) 2% target. Analysts say this, combined with a weak yen, supports the case for continued monetary tightening.
The BOJ raised its policy rate last week to 0.75%, a 30-year high, signaling a decisive move away from decades of ultra-loose monetary policy. Governor Kazuo Ueda has indicated the central bank is prepared to hike rates further if economic conditions and wage growth continue to improve.
However, the yen has weakened sharply, as traders argue the BOJ’s tightening is too gradual. Katayama recently warned that the government might intervene to stabilize the currency, citing “one-sided, sharp moves” in the yen.
Record Spending and Defence Priorities
The draft budget also reflects rising debt-service costs and includes a 3.8% increase in military spending to 9 trillion yen ($60 billion), aligning with Takaichi’s assertive defence policy and U.S. calls for allies to increase defence contributions.
Japan’s factory output fell 2.6% in November, driven by declines in automobile and lithium-ion battery production, further complicating economic forecasts. Analysts note that while headline inflation may temporarily ease, a persistently weak yen could sustain cost pressures and encourage firms to keep raising prices, keeping inflation above target.
Looking Ahead
Takaichi’s “proactive” fiscal policy seeks to bolster consumption and underpin economic growth while signaling fiscal prudence to markets. But Japan faces a delicate trade-off: supporting the economy amid weak output and a volatile currency while avoiding excessive debt accumulation.
As the government finalizes the budget, market participants will watch closely for signs of how Japan navigates rising inflation, interest rates, and public debt—a challenge that will shape both domestic policy and global investor sentiment in the year ahead.