Japan, whose national debt already ranks among the highest in the world, faces concerns that its fiscal health will deteriorate further as the government's expansionary budget stance combines with rising long-term interest rates.
Record 36.6 Trillion Yen Planned
Japan's Ministry of Finance plans to earmark a record 36.6 trillion yen (about 319 trillion won) for debt-servicing costs — principal and interest payments on government bonds — in its budget request for fiscal 2027 (April 2027 to March 2028), the Nihon Keizai Shimbun (Nikkei) reported on the 23rd.
The figure is 5.3 trillion yen (about 46.2 trillion won), or 17%, higher than the initial fiscal 2026 budget for debt servicing, the largest amount in the past 20 years. The increase stems largely from a rise in the assumed interest rate used to calculate bond interest payments, which climbed to 3.8% from 3% in the fiscal 2026 budget.
The total budget request for fiscal 2027 is also projected to exceed 130 trillion yen, up from 122 trillion yen (about 1,065 trillion won) the previous year, Kyodo News reported on the 21st. With no cap set on a newly created growth investment category and interest costs on government bonds surging, the request set a record high for the fourth consecutive year.
Prime Minister Sanae Takaichi has described this budget as marking "the first year of responsible, proactive fiscal policy," but many note that it includes numerous open-ended requests with no specified amounts, meaning the final figure could grow further.
Additional funding needed for next year's budget is expected to exceed 10 trillion yen (about 87.2 trillion won), but the Cabinet Office estimates the increase in tax revenue for fiscal 2027 at just 6.8 trillion yen (about 59.3 trillion won), suggesting it will be difficult to secure the necessary funds. Concerns are also growing that Japan will continue relying on borrowing to fill the gap when tax revenue falls short of expenditures.
Surging Long-Term Rates Sound Alarm Over Vicious Cycle
Earlier, on the 18th, the yield on 10-year Japanese government bonds rose to 2.945% in the country's bond market, a nearly 30-year high, bringing long-term rates to the brink of the 3% range. The Nikkei noted that interest costs could rise further as low-yielding bonds are refinanced at higher rates after they mature.
Some worry that Japan could fall into a vicious cycle in which fiscal deterioration pushes rates higher, and higher rates in turn increase debt-servicing costs. Japan's national debt stood at 204.4% of GDP last year, the highest among major advanced economies.
Compounding this, consumer price growth widened again for the first time in nine months amid "naphtha-flation," in which price increases driven by oil and raw materials spread to everyday consumer goods.
Japan's core-core CPI rose 1.9% year-on-year in July, the first acceleration in nine months, the Financial Times reported on the 21st. The data adds weight to expectations that the Bank of Japan will raise its policy rate to 1.25% at its September meeting.
