Japan budget requests swell, stoking debt fears as long-term rates hit 30-year high

Japanese ministries and agencies submitted initial budget requests for fiscal 2027 by the Aug. 31 deadline, with general account requests estimated at around 143 trillion yen ($894 billion), a record high for the fourth year in a row. This exceeds the 122.45 trillion yen allocated for fiscal 2026. The surge in budget requests is driven by the "strong and prosperous Japan" investment framework, which prioritizes substantial funding.

Markets are cautiously awaiting further developments, but deteriorating public finances could lead to a sell-off in government bonds if concerns persist. The yield on newly issued 10-year Japanese government bonds briefly reached 2.950%, the highest since September 1996, as bond prices fell. U.S. Federal Reserve Chair Kevin Warsh hinted at a potential early interest rate hike, affecting long-term yields.

The rise in long-term rates is attributed to growing fiscal concerns over record-high budget requests, as well as the government's decision to cut the consumption tax and provide benefit payments without identifying alternative funding sources. The projected 5 trillion yen ($31.3 billion) revenue loss from the tax cut further exacerbates the fiscal situation.

Concerns have been raised about the weakening of fiscal discipline and the need for transparency in funding decisions for policy items with no specified amounts.