Japan plans to propose a record fiscal budget, with the largest expected increase in defense spending

Zhitong Finance learned that the Japanese government is expected to approve a record preliminary budget for the next fiscal year on Friday, which will increase defense spending and support for the regional economy. According to a draft plan released on Wednesday, the total budget for the fiscal year starting in April 2025 is approximately 115.5 trillion yen (USD 73.5 billion). Although the draft indicates that the Japanese government will still rely heavily on bond issuance to fund expenditures, record tax revenues will reduce the scale of new bond issuance by nearly one-fifth, to 28.6 trillion yen.

Compared to the initial annual budget of 112.6 trillion yen for the current fiscal year, this increase is about 2.6%, which is broadly in line with the Japanese government's overall inflation forecast for the current fiscal year. Previously, the total expenditure requested by various Japanese departments was 117.6 trillion yen. The largest increase was in defense spending, which surged over 10% to 8.5 trillion yen, while grants to local governments increased by about 7%.

In the context of a tense regional security environment, Japanese Prime Minister Shigeru Ishiba strongly advocates for increased defense spending and improved working conditions for Japanese military personnel. Nevertheless, the increase in the defense budget largely aligns with planned growth for the coming years. Increasing grants to local governments is another important theme for Ishiba, who has long called for more central government support for regional revitalization.

The report shows that funding for social security increased from 37.7 trillion yen to 38.3 trillion yen. The budget does not include a contingency fund for price relief and wage growth measures. While record tax revenues of 78.4 trillion yen will help limit reliance on government debt, the latest budget plan will increase Japan's debt burden. The International Monetary Fund (IMF) has estimated that by 2024, Japan's debt burden will exceed 250% of its Gross Domestic Product (GDP).

However, considering that the Bank of Japan may continue to raise interest rates, the Japanese government's reduction of new bond issuance comes at a critical time. This will put upward pressure on debt repayment costs. According to informed sources, the Japanese government has set the cumulative interest rate for calculating national debt repayment costs in the latest budget at 2%, up from 1.9% in this year's initial budget.

Bank of Japan Governor Kazuo Ueda stated on Wednesday that Japan's economy is expected to be closer to sustainably achieving the central bank's 2% inflation target next year, suggesting that the timing for the next interest rate hike is approaching. However, he warned that it is necessary to carefully study the impact of the "high uncertainty" surrounding the overseas economy, particularly the economic policies of the incoming U.S. President Donald Trump.

Ueda emphasized that the outlook for wage negotiations between Japanese companies and labor unions next year is also crucial when explaining the factors that the Bank of Japan will carefully consider in formulating policy. His remarks highlight the Bank of Japan's determination to continue raising the current short-term interest rate of 0.25% next year. Most analysts expect the Bank of Japan to raise interest rates to 0.5% in January or March next year.

The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled that it is prepared to raise interest rates again if wages and prices move as expected.

Ueda stated that as labor shortages drive up wages, consumption has shown signs of improvement. He emphasized that after years of aggressive monetary stimulus, the Bank of Japan has made progress in sustainably achieving its price target Ueda Kazuo said that during the current transition phase to achieve a 2% inflation rate in a sustainable manner, the Bank of Japan will support the economy by keeping the policy interest rate at a level lower than the neutral level for the economy. However, he stated that if the economy continues to improve, the Bank of Japan will raise interest rates, as maintaining excessive monetary support for too long could exacerbate inflation risks