Japan’s government is gearing up to propose a record budget of 115.5 trillion yen (approximately $735 billion) for the fiscal year starting April 2025, reflecting significant increases in defense and social spending. This ambitious budget plan, expected to receive cabinet approval soon, is seen as necessary amid growing economic pressures and the changing fiscal environment.
Prime Minister Shigeru Ishiba’s administration has emphasized increased spending on defense, coupled with support for local economies as key priorities. The proposed budget marks about a 2.6% increase from this fiscal year's initial budget of 112.6 trillion yen, bringing the figures closely aligned with the government's anticipated inflation of around 2.5% this year. The expansion is largely driven by heightened defense expenditure, set to see an over 10% increase, totaling 8.5 trillion yen, along with around 7% growth for local government grants.
Most of this spending will rely on tax revenues, which are projected to hit record levels of 78.4 trillion yen, up about 8.8 trillion yen from this year. Experts believe this increase can significantly ease the government's dependence on debt. According to Masaki Kuwahara, senior rates strategist at Nomura Securities, "The primary balance deficit will also likely turn out to be considerably smaller," indicating potential for improved fiscal health moving forward.
While Japan’s fiscal challenges remain significant, tax revenue growth will enable the government to cut back on new bond issuances. The planned new bond issuance for next fiscal year is set at 28.6 trillion yen, down from initial estimates of 35.4 trillion yen. This will be the first time since 2008 the issuance falls below the ¥30 trillion threshold, which is promising for Japan’s overall fiscal condition burdened by the highest government debt load among advanced economies—exceeding 250% of its GDP.
The forthcoming budget follows the Bank of Japan’s (BOJ) shift away from its decade-long monetary stimulus programs, which has increased pressure on the administration to drive economic recovery. BOJ Governor Kazuo Ueda has indicated the economy is anticipated to reach sustainable inflation rates of around 2% by 2025, affirming, "Japan’s economy will move closer to sustainable and stable 2 percent inflation [in 2025], accompanied by wage increases." This shift signifies the end of reliance on the central bank to finance the government’s obligations.
With the budget draft set for parliamentary deliberation early next year, it is seen as a pivotal moment for Japan amid regional and global economic uncertainties. Notably, the economic growth rate projection for next fiscal year remains at 1.2%. Still, the government has revised down the growth estimate for the current fiscal year to 0.4%, down from 0.7%, which reflects external pressures such as economic slowdowns affecting exports, particularly from China.
Investors have responded positively to the news of the planned budget. Japan's Nikkei 225 index surged nearly 1% following the announcement, highlighting growing confidence as markets anticipate the government's efforts to bolster economic recovery through targeted spending. The rise of local government grants reflects Ishiba's commitment to regional revitalization as he calls for more central support.
Although the budget does not account for reserve funds aimed at price relief or wage growth measures, the significant increases in social safety nets demonstrate the government’s dedication to protecting citizens against economic hardships.
Given the current global economic conditions and Japan's stagnant wage growth, how effectively the government can balance increased spending with the need to limit debt accumulation remains to be seen. The budget proposal, seen as a strategic pivot, reveals both the challenges and opportunities faced by Japan as it navigates through the post-pandemic recovery.
While the international financial community keeps eyes on Japan's approach to economic management, the broader Asian markets exhibited mixed reactions to global economic signals, emphasizing the interconnected nature of economic policies and market reactions.
