Japan Cabinet Approves Record FY2026 Draft Budget Under PM’s Plan

TOKYO, Dec 26 (Bernama-Kyodo) -- Japan's Cabinet on Friday approved a record 122.31 trillion yen (US$783 billion) draft initial budget for fiscal 2026, reflecting Prime Minister Sanae Takaichi's expansionary fiscal stance to spur growth and boost defence spending, despite concerns over public finances.

According to Kyodo News Agency, the general-account budget plan is a record high for the second straight year, exceeding the initial 115.20 trillion yen budget for fiscal 2025, as rising prices are pushing up personnel and other fixed costs, while the ageing population is inflating welfare expenditure.

Under the draft budget for the year starting in April, the government plans to issue 29.58 trillion yen in new bonds to cover a revenue shortfall, underscoring Japan's heavy reliance on debt and adding to concerns over its already strained public finances. Japan's fiscal health is the worst among the Group of Seven economies.

Following the approval, Finance Minister Satsuki Katayama said new bond issuance is likely to remain below 30 trillion yen for a second straight year, while the debt dependency ratio is projected to fall to 24.2 per cent in fiscal 2026 from 24.9 per cent a year earlier.

“I believe we have compiled a draft budget that strikes a balance between achieving a strong economy and ensuring fiscal sustainability, while paying close attention to fiscal discipline,” Katayama said at a news conference.

Marking the first full-year spending plan since Takaichi took office in October, the budget bill is expected to clear the Diet by the end of the current fiscal year.

Takaichi's aggressive spending policy has pressured the yen against major currencies in the foreign exchange market, boding ill for a country that relies heavily on imported energy sources.

Debt-servicing costs, including redemption and interest payments, reached a fresh record of 31.28 trillion yen against a backdrop of the recent rise in long-term yields.

The Finance Ministry set the assumed interest rate used to calculate interest payments at 3.0 per cent, up sharply from 2.0 per cent for fiscal 2025.

Long-term borrowing costs have been trending higher amid market expectations that the Bank of Japan will continue raising interest rates following its latest hike this month, compounded by concerns over Japan's fiscal sustainability.

Outstanding central and local government bonds are projected to total 1,344 trillion yen at the end of fiscal 2026, nearly twice Japan's gross domestic product, according to the Finance Ministry.

Among other major items, 39.06 trillion yen has been set aside for social welfare, which typically accounts for the largest share of Japan's national budget and reflects an upward revision to medical fees that serve as a key revenue source for hospitals.

A record 9.04 trillion yen has been earmarked for defence-related purposes, while 1.00 trillion yen has been allocated to reserve funds for emergencies.

For infrastructure projects, 6.11 trillion yen has been budgeted to help maintain ageing water and sewerage systems and other facilities nationwide, following a deadly sinkhole accident in Saitama Prefecture in January.

Agriculture and fisheries will receive 2.30 trillion yen, partly aimed at stabilising the supply of rice amid a recent rise in prices.

On the revenue side, tax receipts are projected to reach 83.74 trillion yen, marking a record high for the seventh consecutive year, partly supported by solid corporate earnings.

Under a slogan of “responsible and proactive public finances”, Takaichi has vowed to achieve a strong economy through stimulus measures, including investment in semiconductors and other strategically important sectors.

The size of the draft budget was also influenced by political concessions, as Takaichi's ruling bloc, which has a slim majority in the House of Representatives but remains a minority in the House of Councillors, accepted some requests from opposition parties.

Among them, the Democratic Party for the People has said it will support the budget in exchange for agreement on its signature policy to raise the non-taxable income threshold, aimed at boosting workers' disposable income.

Earlier this week, the Cabinet Office said Japan's economy is projected to grow by a real 1.3 per cent in fiscal 2026, compared with an estimated 1.1 per cent expansion in the current fiscal year. The forecast was used as the basis for estimating tax revenue for the fiscal year.

-- BERNAMA-KYODO