Japan's budget requests for the upcoming fiscal year are set to reach an unprecedented level, potentially magnifying the perceived pace of fiscal expansion as Prime Minister Shigeru Ishiba pushes to consolidate more spending into the initial budget rather than relying on supplementary packages later in the year. For the fiscal year beginning next April, total requests are likely to exceed last year's record of 122 trillion yen (approximately $767 billion). Various ministries are expected to submit their proposals as early as next week, after which the Finance Ministry will conduct its review, with the entire budget compilation process anticipated to conclude by year-end.
The sharp rise in total requests may initially spark concerns among investors regarding the sustainability of the Ishiba administration's spending plans. However, this increase partly reflects Ishiba's efforts to overhaul the national budget process through a series of structural changes, which could make it difficult to draw direct like-for-like comparisons between spending programs across different years.
Where the numbers stand
Japan's initial budget could potentially exceed 140 trillion yen, according to projections from the First Life Research Institute. Senior economist Akihiro Nomura commented on Thursday that "this is a make-or-break budget. If handled improperly, the risk is that the debt-to-GDP ratio could eventually embark on an unsustainable divergent expansion path."
One of the most significant reforms under consideration by the Prime Minister involves curbing the use of supplementary budgets and shifting those expenditures into the initial budget to enhance transparency. For nearly eight decades, Japan has relied on supplementary budgets annually to fund economic stimulus measures, disaster relief, and responses to other unexpected shocks. Stimulus packages exceeding 10 trillion yen have become increasingly common.
Nomura noted that "the amount of spending requiring scrutiny will increase substantially. In last year's 18.3 trillion yen supplementary budget, the Finance Ministry must decide which components should be transferred to the initial budget." Supplementary budgets are typically compiled in autumn and include not only temporary measures such as cost-of-living subsidies but also project expenditures that recur every year. This tendency suggests that some bureaucrats may primarily view supplementary budgets as a "second opportunity" to secure funding for existing spending programs.
For instance, the Ministry of Economy, Trade and Industry received approximately 851 billion yen in last year's initial budget, only to secure an additional 2 trillion yen through a supplementary budget. Consolidating more of such expenditures into a single budget would significantly inflate the size of the initial budget proposal.
The bond market connection
Ishiba's fiscal reforms share a common underlying logic with the recent US Treasury selloff: America's $40 trillion debt burden, a fiscal deficit near 6% of GDP, and a wave of corporate bond issuance from AI-related companies, combined with Japan's expansionary budget within an already fragile debt framework, are collectively compelling investors to demand higher term premiums on long-duration bonds. More critically, Japan stands as the largest foreign holder of US Treasuries; when Japanese government bond yields rise and yen hedging costs remain elevated, the relative returns for Japanese investors holding US debt diminish, potentially reducing their appetite for additional purchases or even prompting repatriation of funds, thereby further weakening demand at the long end of the US Treasury curve.
Meanwhile, ministries may exercise caution about "standing out" by submitting excessively high budget requests and will attempt to limit the growth of their proposed amounts. The Finance Minister has described this reform as the most significant change to Japan's budget process since World War II. The reforms will include a thorough re-examination of various programs to eliminate unnecessary expenditures or projects that have outlived their purpose. According to Katayama, this will help raise funds for measures such as reducing the consumption tax. However, whether this spending review will genuinely go further than previous efforts to cut wasteful expenditures remains to be seen.
Nomura observed that "even if the Finance Ministry takes a very tough stance and succeeds in suppressing the initial budget, if these expenditures are truly necessary, they may still be brought back to the table in the autumn."
As another pillar of the reform, Ishiba has introduced a multi-year investment framework independent of routine spending. Capital investment funds linked to his signature growth strategy—spanning 14 years with a scale of 370 trillion yen—will be requested through this new framework, allowing ministries to compete for funding without the constraints of regular spending caps.
All this comes at a time when investors are already questioning how Ishiba will finance his fiscal agenda, which includes expensive measures such as suspending the consumption tax on food and increasing defense spending. Given the potential difficulty in comparing these figures with those of previous years, a clearer picture may not emerge until the government finalizes the budget and its proposed bond issuance plan before year-end. Ultimately, even a substantially enlarged initial budget may total less than the combined sum of initial and supplementary budgets in recent years.
The financing structure further complicates comparisons. Under the new multi-year framework, investments in areas deemed critical to economic security will be managed separately through designated accounts, funded via bridge bonds backed by specified revenue sources.
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