Japan's FY2027 budget requests to top ¥130 tril for new record high

Japan’s government faces mounting pressure as it prepares to unveil its fiscal 2027 budget, which is expected to surpass last year’s record-high level of ¥122 trillion ($767 billion). According to sources familiar with the process, the total budget requests from ministries and agencies are projected to reach more than ¥130 trillion, driven largely by increased spending on growth strategies and national security initiatives. The shift marks a departure from past practices, as Prime Minister Sanae Takaichi’s administration has opted not to impose spending ceilings on ministries, allowing them greater flexibility in proposing funding for long-term projects. The revised approach comes as the government aims to reduce its dependence on supplementary budgets, which have been frequently used to address unexpected expenses or policy shifts. Instead, the current plan involves securing upfront funding for policies requiring multiyear implementation. This change is expected to result in a larger-than-initially-requested final budget, as many spending figures remain subject to negotiation before being finalized. The proposed budget reflects growing concerns over Japan’s fiscal health, particularly as tax revenues for fiscal 2026 are estimated at ¥83 trillion. If the government proceeds with budget requests exceeding ¥130 trillion, it would necessitate issuing additional debt, compounding the nation’s already dire financial situation. Japan holds the worst fiscal position among advanced economies, with public debt exceeding 260% of GDP. Ministries and agencies were required to submit their budget proposals by the end of this month, with the Finance Ministry scheduled to compile the final budget by year-end. Among the largest requests is from the Ministry of Economy, Trade and Industry, which seeks approximately ¥7.7 trillion, including ¥4.5 trillion allocated for growth strategy investments in sectors such as artificial intelligence and semiconductor development. These allocations aim to bolster Japan’s technological competitiveness and attract private sector participation. The Ministry of Education, Culture, Sports, Science and Technology is requesting ¥8.7 trillion, a rise of ¥2.8 trillion compared to the previous year. This increase focuses on expanding education and training programs related to digital transformation, aligning with broader efforts to modernize the workforce. Meanwhile, the Defense Ministry has submitted a record request of ¥8.9 trillion to fund the deployment of interceptor drones and other measures aimed at accelerating military modernization. The Foreign Ministry is expected to seek ¥1.2 trillion, up from ¥870 billion in the prior fiscal year. A portion of this funding, over ¥200 billion, is designated for growth strategy initiatives, while the remainder supports expanded official development assistance and security cooperation with allied nations. These moves reflect Japan’s increasing emphasis on strengthening diplomatic and strategic partnerships. Social welfare expenditures, including pensions and healthcare, are anticipated to rise by approximately ¥390 billion, driven by demographic pressures linked to Japan’s aging population. Additionally, debt servicing costs are forecast to exceed ¥31.3 trillion, surpassing the figure allocated in the fiscal 2026 budget. The Finance Ministry has adjusted the assumed interest rate for calculating these costs from 3.0% in fiscal 2026 to 3.8% for fiscal 2027, signaling rising borrowing costs. Market expectations for higher interest rates have contributed to an upward trend in government bond yields. This follows the Bank of Japan’s decision in June to raise its key policy interest rate to a 31-year high of 1.0%, prompting speculation that further increases may follow. Prime Minister Takaichi emphasized in July that the new growth investment framework is intended to stimulate private-sector capital investment, reinforcing her commitment to promoting economic expansion and enhancing national security through targeted fiscal measures.