Japan's Budget Requests Balloon to Pandemic-Era Levels Under Takaichi

Japan's government agencies have submitted budget requests totalling 143.66 trillion yen ($922 billion) for the next fiscal year, a scale comparable to pandemic-era spending, according to the Ministry of Finance. The figure reflects Prime Minister Sanae Takaichi's expansionary fiscal agenda, which has also pushed government borrowing costs to their highest level in three decades.

The total surpasses the 140.61 trillion yen combined spending package finalised in Takaichi's first year in office, which included an 18.3 trillion yen supplementary budget for fiscal 2025 and a 122.3 trillion yen initial budget for fiscal 2026. The latest requests were compiled under a new framework that integrates initial and supplementary budget spending.

A significant portion of the increase stems from 12.2 trillion yen in requests under a new investment programme targeting strategic sectors such as artificial intelligence, semiconductors and economic security. Defence spending has also been requested without a specified amount, as the government reviews its defence strategy, which could lead to additional military procurement.

Higher borrowing costs have added pressure. The finance ministry raised its assumed interest rate to 3.8% from 3.0% in the fiscal 2026 budget, after the 10-year government bond yield hit 3% for the first time since 1996. This pushed debt-servicing requests, including interest payments and redemption, to a record 36.64 trillion yen — 5.36 trillion yen more than the current fiscal year.

The finance ministry will scrutinise the requests before the government finalises the budget at year-end. Market attention is now shifting to the scale of new bond issuance in the fiscal 2027 budget. Takaichi told the Yomiuri newspaper last week that the government aims to keep new issuance around 40 trillion yen, roughly in line with the fiscal 2025 budget.

"While Takaichi's growth strategy seeks to boost Japan's long-term growth potential through investment, markets remain focused on near-term signals such as budget size and bond issuance," said Saisuke Sakai, senior economist at Mizuho Research Institute. "Markets are looking for proof that higher spending will translate into stronger growth, backed by reforms that address structural constraints such as labour, land and energy shortages."