The Japanese government is preparing the largest budget ever for the next fiscal year. It plans to allocate a record-breaking amount equivalent to 80 trillion won solely for defense spending. With a significant increase in tax revenue due to improved corporate earnings, the issuance of new government bonds is expected to decrease.
According to the Asahi Shimbun and Bloomberg News on the 26th, the Japanese government intends to draft a total budget of 115.54 trillion yen (approximately 1,073 trillion won) for the 2025 fiscal year (April 2025 to March 2026), which is nearly 3 trillion yen more than the 2024 fiscal year budget (112.6 trillion yen). Asahi explained, "This surpasses the 114.3 trillion yen budget of the 2023 fiscal year, making it the largest budget ever."
The formation of this super budget is due to a sharp increase in defense spending. The Japanese government is reported to allocate 8.67 trillion yen for the 2025 defense budget. This is about 750 billion yen more than the 2024 fiscal year defense budget. If confirmed, it will be the first time the annual defense budget exceeds 8 trillion yen.
The background for the increase in defense spending lies in the military strengthening policy led by former Prime Minister Fumio Kishida. In December 2022, Japan revised its three major security documents, deciding to raise the defense-related budget to 2% of GDP by the 2027 fiscal year and secure about 43 trillion yen (approximately 399 trillion won) for defense spending over five years.
Alongside this, former Defense Minister Shigeru Ishiba is also regarded as a strong advocate for increased military expenditure. Bloomberg added, "Ishiba has consistently argued for increasing military spending and improving working conditions for military personnel amid heightened security tensions in Asia." Asahi also noted, "Besides defense spending, costs related to social security and increased interest payments on government bonds influenced the formation of the largest budget."
Issuing government bonds is inevitable for the Japanese government to cover the largest budget ever. However, due to improved corporate earnings and high inflation, tax revenue for the 2025 fiscal year is expected to increase significantly, resulting in new government bond issuance falling below 30 trillion yen for the first time in 17 years. According to Asahi, the issuance of government bonds next year is forecasted to decrease by 6.8 trillion yen from the 2024 fiscal year to 28.65 trillion yen.
Bloomberg pointed out that "the reduction in new government bond issuance occurred at a time when the Bank of Japan (BOJ) is likely to continue raising interest rates." The decrease in new bond issuance is not expected to have a major impact on the BOJ's policy of raising its benchmark interest rate.
However, Bloomberg analyzed that "with Japan's debt already expected to exceed 250% of GDP this year, such a budget for next year could raise concerns about Japan's debt." Masaki Kuwahara, senior interest rate strategist at Nomura Securities, emphasized, "While tax revenue increases may allow for some rise in spending, it remains important for the government to maintain balance."
The Japanese government plans to finalize the budget at a cabinet meeting as early as the 27th. Some speculate that since the ruling Liberal Democratic Party and coalition partner Komeito do not hold a majority of seats, the budget may be increased during the regular Diet session next year.
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