Budget requests from Japan's central government agencies for fiscal 2027 have topped a record 140 trillion yen (about 1,201 trillion won). With rising long-term interest rates limiting the room for government bond issuance and funding needed for Prime Minister Sanae Takaichi's pledged cut to the food consumption tax, warning signs are flashing over Japan's public finances.
The Nihon Keizai Shimbun reported on the 31st of last month that the combined requests submitted by government agencies to the Ministry of Finance total around 143 trillion yen (1,225 trillion won), calling the scale "comparable to the levels seen during the COVID-19 pandemic."
That exceeds by about 3 trillion yen the 140.6 trillion yen figure — the sum of the fiscal 2025 supplementary budget and the initial fiscal 2026 budget — that has been cited as the total the market can absorb. Nikkei had earlier reported that the 140.6 trillion yen combined figure "is being discussed within the Finance Ministry and in the market as one benchmark, and there is a strong sense that this number is being kept in mind."
Analysts say the Takaichi government's expansionary fiscal stance is evident in the budget drafting process itself. The government plans to end the practice of compiling supplementary budgets beyond what is necessary — a route that has carried large outlays every year — and to fold appropriate programs into the main budget instead. It has also created a separate budget framework for crisis management and growth investment, the administration's core policies, and decided not to cap the amounts agencies may request.
As a result, total budget requests have swelled. The initial budget for this year stood at 122.3 trillion yen, while requests for fiscal 2027 came to 143 trillion yen, up 16%. Beyond the increase that naturally follows from moving policies once housed in supplementary budgets into the main budget, some agencies submit program items without specifying amounts, meaning the actual scale of requests could run beyond roughly 140 trillion yen.
Plans to secure the funding, by contrast, remain uncertain. The Japanese government has issued new bonds because tax revenue and non-tax revenue alone cannot cover spending. But the yield on 10-year Japanese government bonds climbed to 2.950% in the Tokyo bond market that day, the highest level in about 30 years since September 1996, leaving bond issuance up against its limits. A sharp increase in issuance can push bond prices lower and drive yields higher.
Rising long-term rates have already increased spending on items such as interest payments on government bonds. The Finance Ministry is requesting 36.6386 trillion yen for national debt service, which covers principal and interest payments on government bonds. That is 17.1% higher than this year's initial budget and the largest amount on record. The assumed interest rate used to calculate interest payments will be raised to 3.8% from 3.0% this year.
Annual bond issuance last year, including the supplementary budget, came to 37.3 trillion yen, and this year it fell somewhat to 32.6 trillion yen. Because of that, the market views the roughly 40 trillion yen level — the combined issuance under last year's supplementary budget and this year's initial budget — as a ceiling for cushioning market shocks. The government is accordingly considering holding new bond issuance to around 40 trillion yen, according to sources.
Funding is also needed for the cut to the food consumption tax, a signature Takaichi pledge. The policy is set to take effect next spring and is expected to reduce tax revenue by about 4 trillion yen, but Takaichi has drawn a line, saying she will not rely on deficit-financing bonds.
In practice, however, securing the money without issuing bonds will not be easy. According to a medium- to long-term economic and fiscal outlook released by Japan's Cabinet Office in July, general account spending in fiscal 2027 will total 138.1 trillion yen, with tax revenue at 90.5 trillion yen and non-tax revenue at 8.3 trillion yen. Factoring the consumption tax cut into that outlook reduces actual tax revenue by about 4 trillion yen. Holding new bond issuance to the 40 trillion yen benchmark would leave revenue short, according to Nikkei's analysis.
Security spending could also rise. Japan's three security-related documents governing defense policy are due to be revised at the end of the year. The Defense Ministry has requested 8.9 trillion yen for fiscal 2027, and further increases are possible depending on the revisions. Some in the market are warning of a shock in which program budgets balloon at the request stage, feeding concerns about deteriorating public finances that in turn push interest rates higher.
