Takaichi’s Aggressive Budget Risking Market Trust Lapse

Tokyo, Dec. 26 (Jiji Press)–Swelling debt-servicing costs, shown by Japan’s fiscal 2026 initial budget drafted by the government, will pose the risk of Prime Minister Sanae Takaichi’s expansionary fiscal policy losing market confidence, experts warn. The draft budget, adopted at a cabinet meeting Friday, estimates that the government’s combined expenses for redeeming its debt securities and paying interests on them will reach a record 31,275.8 billion yen. Amid rising long-term interest rates in the country, the interest payment burden, in particular, will rise to the unprecedented level of 13,037.1 billion yen. Although new Japanese government bond issues to cover state funding shortfalls will grow only marginally to 29,584.0 billion yen from 28,647.1 billion yen, a 17-year low, in the initial budget for the current fiscal year ending next March, this is not because of expenditure cuts but because of an increase in tax revenue reflecting higher prices and robust corporate earnings. With the government keeping placing new issues, the amount of JGBs outstanding is projected to hit 1,145 trillion yen at the end of fiscal 2026. In the JGB market, the yield on the benchmark 10-year issue, the country’s key long-term interest rate, began to ascend at a faster pace after Takaichi launched her government in October under the banner of managing fiscal policy in an aggressive but responsible manner. It climbed to 2.100 pct for the first time in almost 27 years on Monday, also fueled by the Bank of Japan’s decision late last week to raise its target interest rate. Under the circumstances, the government pushed up the assumed interest rate reflecting recent market rates, used to figure out JGB interest payment costs, from tentatively set 2.6 pct as of August to 3.0 pct in the final budget plan. The Finance Ministry expects those costs to swell to around 16.1 trillion yen if market long-term rates rise to 2.5 pct on average by fiscal 2028, and to 25.6 trillion yen in fiscal 2034 even if the rates go sideways thereafter. The government’s JGB interest payments will grow as long as rollovers to higher-yielding issues continue, experts pointed out. Denying austere fiscal policy, the reflationist prime minister intends to drop the long-held target of achieving a primary budget surplus in the country in a particular year and instead monitor the balance of revenues and expenditures at the central and local governments for several years. Takaichi underscores the importance of implementing aggressive fiscal policy measures to make Japan strong again. But if the country derails from a track toward restoring its fiscal health, it could add to market anxiety and cause interest rates to spike up further, analysts noted. END [Copyright The Jiji Press, Ltd.]