Japan's largest budget in history:

Japan’s Takashi Cabinet approved a record ¥122.3 trillion ($785 billion) budget on Friday. While pursuing an expansionary fiscal policy, it sought to ease bond market concerns by cutting ultra-long-term bond issuances and capping the scale of new debt sales.

According to a Reuters report on Friday, Finance Minister Satsuki Katayama stated that although the budget size hit an all-time high, it was not excessive relative to the size of the economy. The ratio of the initial budget to nominal GDP has remained unchanged for three consecutive years. The government successfully kept new bond issuances below ¥30 trillion, achieving a long-standing goal of the Ministry of Finance.

The budget significantly ramps up investment in cutting-edge technologies. The Ministry of Economy, Trade and Industry’s (METI) spending on chips and artificial intelligence (AI) will surge to approximately ¥1.23 trillion, nearly quadrupling from the previous fiscal year. This includes ¥150 billion in support for state-backed chipmaker Rapidus Corp., as well as ¥387.3 billion earmarked for AI development initiatives.

Bond market jitters over the Takashi administration’s expansionary fiscal policy have pushed up Japanese government bond (JGB) yields, forcing the government to demonstrate fiscal discipline in budget formulation. Ultra-long-term bond issuances will be slashed to ¥17.4 trillion, the lowest level in 17 years.

## Debt Management: Sharp Cut in Ultra-Long Bond Issuances to Soothe Markets

Facing pressure from JGB yields hitting successive record highs recently, Japan’s Ministry of Finance will reduce ultra-long-term bond issuances by nearly one-fifth from the previous fiscal year to ¥17.4 trillion in the new fiscal year budget, marking the lowest level in 17 years.

Market concerns that the Takashi administration’s expansionary fiscal policy could exacerbate the debt burden have driven up JGB yields. Japan already has the heaviest debt burden among developed economies, with debt exceeding twice the size of its economy, making it highly sensitive to rising borrowing costs.

In response to market concerns, the Ministry of Finance will hold hearings with market participants around June every year starting from the next fiscal year to gather feedback and make adjustments as needed. Back in June this year, a sell-off in the bond market forced the Ministry of Finance to make a rare revision to its issuance plan, cutting ultra-long-term bond issuances from ¥24.6 trillion to ¥21.4 trillion.

Total JGB issuances for the new fiscal year (including ultra-long-term bonds) will reach ¥180.7 trillion, a nearly 5% decrease from the total amount of the current fiscal year (including supplementary budgets). The Ministry of Finance will keep the issuance volume of benchmark 10-year JGBs unchanged, while increasing the combined issuance of 2-year and 5-year bonds by ¥2.4 trillion.

## Technology Investment: Surging Spending on Chips and AI to Drive Industrial Upgrading

METI’s budget will rise by around 50% year-on-year to ¥3.07 trillion, primarily driven by a sharp increase in spending on chips and AI. Budget support for the chip and AI sectors will skyrocket from approximately ¥300 billion in the previous fiscal year to ¥1.23 trillion, representing a nearly fourfold increase.

In the semiconductor sector, the government has reserved ¥150 billion for state-backed chipmaker Rapidus Corp., bringing the cumulative government investment in the company to ¥250 billion. For AI, ¥387.3 billion will be allocated to the development of homegrown foundational AI models, the enhancement of data infrastructure, and the research and development of "physical AI" technologies.

This substantial increase in technology investment comes amid fierce competition between the United States and China in cutting-edge technology sectors, as Japan seeks to strengthen its capabilities in these critical fields. The government also plans to fund chip and AI initiatives primarily through the regular budget rather than supplementary budgets starting from the next fiscal year, ensuring more stable financial support.

The budget also sets aside ¥5 billion to secure the supply of critical minerals including rare earths, and allocates ¥122 billion for decarbonization projects including the development of next-generation nuclear power plants.

## Fiscal Discipline: Debt Dependency Ratio Hits 26-Year Low

Despite the record-high total budget size, new bond issuances will only edge up slightly from ¥28.6 trillion in the current fiscal year to ¥29.6 trillion. The debt dependency ratio will drop to 24.2%, the lowest level since 1998.

Tax revenue is projected to grow by 7.6% to a record ¥83.7 trillion, helping to fund the increased expenditures. However, the growth in tax revenue will not fully offset the impact of surging debt-servicing costs and rising spending on social security and national defense.

As the Bank of Japan exits its ultra-loose monetary policy, debt-servicing costs are set to jump by 10.8% to ¥31.3 trillion, assuming an interest rate of 3.0%—the highest level in 29 years. This underscores the high sensitivity of Japan’s massive debt burden to rising interest rates.

According to Bloomberg, Finance Minister Satsuki Katayama emphasized that the new budget reflects current economic conditions and price trends, and its size is not overly large relative to the economy. The Takashi administration plans to abandon the fiscal consolidation target of achieving annual primary balance, and instead set new multi-year goals to allow for more flexible spending arrangements.

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