FXT Financial Focus (Asia-Pacific 09/02)Japan’s Record Budget Requests Raise Fiscal Concerns

Japan‘s fiscal expansion is gaining momentum, with 18 ministries and government agencies requesting around JPY 143 trillion for the next fiscal year, a record high. The Ministry of Economy, Trade and Industry requested more than five times last year’s amount, while defense and social security demands also reached records. As some items remain unspecified, the total could rise further.

The increase partly reflects the Takaichi governments changes to the budgeting process. Japan traditionally sets an initial annual budget before adding stimulus and industrial support through supplementary budgets. Takaichi aims to reduce reliance on supplementary spending by bringing more expenditures into the initial budget, improving transparency and predictability.

The government is also pursuing a multi-year growth strategy, providing longer-term fiscal support for industrial investment, technological innovation and economic security. Related requests can exceed conventional spending caps, giving ministries greater room to seek funding and contributing to the sharp increase in METIs request.

The government argues that the new requests should not be compared directly with previous initial budgets. This fiscal year‘s initial budget was about JPY 122 trillion, while last year’s supplementary budget totaled roughly JPY 18.3 trillion, bringing combined spending to around JPY 140.6 trillion. On this basis, the JPY 143 trillion request remains high, but part of the increase reflects spending previously included in supplementary budgets.

Markets are more focused on how the spending will be financed. Japan‘s 10-year government bond yield rose to 3% on Tuesday, its highest level since 1996. Higher borrowing costs will gradually increase the interest burden on new debt, challenging Japan’s long-standing reliance on ultra-low rates to support large-scale fiscal spending.

Attention will now turn to the Ministry of Finances budget review, as JPY 143 trillion represents ministry requests rather than final spending. A significant reduction before year-end could ease fiscal pressure, while retaining most new programs and relying more heavily on bond issuance would intensify concerns over debt costs and fiscal sustainability.

From FXTs perspective, the record budget requests reflect a shift in how the Takaichi government allocates fiscal resources, with greater emphasis on growth and industrial policy. The ultimate impact will depend on the final budget size, funding sources and economic returns. With government bond yields already elevated, balancing growth ambitions against rising debt costs will be the key fiscal challenge ahead.