Japan's FY 2027 budget requests to top 130 tril. yen for new record high

Japan's budget requests for fiscal 2027 are set to surpass 130 trillion yen, marking a new record high, according to sources close to the matter. This significant increase, compared to last year's record of 122 trillion yen, is primarily due to the government's promotion of growth investment. With no caps set on ministries' requests for growth strategy spending, the budget drafting reform under Prime Minister Sanae Takaichi's administration allows for more substantial funding.

The draft budget, expected by year-end, could potentially surpass the initial requests as spending details remain unclear until negotiations conclude. With tax revenue for fiscal 2026 forecasted at 83 trillion yen, the projected requests exceeding 130 trillion yen could result in new debt issuance, exacerbating already poor fiscal health among advanced economies.

Ministries and agencies have until the end of the month to submit their budget requests for the next fiscal year, ahead of the Finance Ministry's compilation by the end of the year. The Ministry of Economy, Trade and Industry seeks approximately 7.7 trillion yen, largely for growth strategy investments in AI and semiconductors. Education seeks about 8.7 trillion yen, including a 2.8 trillion yen increase over the previous year for digitalization-related human resource development.

The Defense Ministry requests a record 8.9 trillion yen for interceptor drones and defense buildup measures. The Foreign Ministry aims to increase its budget to 1.2 trillion yen, up from 870 billion yen in fiscal 2026, to bolster official development assistance and security assistance programs. Social security expenditures, including pension and medical costs, are projected to rise by around 390 billion yen, reflecting the aging population.

Debt servicing costs are expected to exceed the 31.3 trillion yen allocated in the fiscal 2026 budget. The Finance Ministry initially assumed a 3.0 percent interest rate for fiscal 2026, which is projected to increase to 3.8 percent for fiscal 2027. Government bond yields have risen due to expectations of the Bank of Japan continuing to raise interest rates after increasing the key policy rate to a 31-year high of 1.0 percent in June.