Japan Plans Record ¥122 Trillion Budget for FY26 as Debt Costs Rise

Japan is preparing its largest-ever national budget for the fiscal year starting April 2026. Prime Minister Sanae Takaichi announced that total spending will reach about ¥122.3 trillion, up 6.3% from the current year. The plan aims to support the economy while keeping public finances stable.

Less Dependence on New Debt

The government will raise around ¥29.6 trillion through new bond issuance. This lowers debt reliance to 24.2%, showing an effort to gradually improve fiscal discipline even as spending grows.

Rising Borrowing Costs

Japan now expects higher interest costs. The Finance Ministry will assume a 3.0% bond interest rate for FY2026 — the highest since 1997. This is up from 2.6% in August and 2.0% in the current budget. As yields rise, the government must offer higher coupons to attract buyers, pushing debt-servicing costs toward record levels.

Market Reaction: Mixed Signals

• Yield on 40-year JGB fell to 3.62%, the lowest since November 17.
• Two-year JGB yield climbed to a record 1.125%, the highest since 1996.
• Latest 2-year auction showed softer demand with a bid-to-cover ratio of 3.26 vs the 12-month average of 3.65.

Investors expect the Bank of Japan may raise rates further after its recent hike, now at a three-decade high. Governor Kazuo Ueda has provided little guidance, adding uncertainty and pushing short-term yields higher.

What This Means

Japan is entering a period where economic support and fiscal responsibility must move together. Higher interest rates make borrowing more expensive, but they also help stabilize the yen and control inflation. The budget is expected to receive formal approval on Friday.