The Japanese government, led by Prime Minister Sanae Takaichi, has given the green light to a historic national budget for the upcoming fiscal year. This massive financial plan, set to begin in April 2026, is designed to tackle persistent inflation, cover soaring social security costs, and significantly ramp up military spending in response to regional security challenges.
A Budget of Historic Proportions
On Friday, the cabinet approved a staggering 122.3 trillion yen (approximately $782 billion) in expenditure. This figure shatters the previous record of 115 trillion yen sought for the current fiscal year ending in March. The driving forces behind this expansion are twofold: the need to support an ageing population through social security and a sweeping upgrade of Japan's Self-Defence Forces.
At the heart of the military build-up is a planned allocation of around nine trillion yen for defence. The Defence Ministry has starkly warned that Japan confronts its most severe security landscape since the end of World War II, necessitating a fundamental strengthening of its capabilities.
The SHIELD System and Economic Concerns
A centrepiece of the new defence request is 100 billion yen for the SHIELD coastal defence system. SHIELD, which stands for Synchronised, Hybrid, Integrated and Enhanced Littoral Defence, aims to utilise advanced drone technology to repel potential invasions. The system is targeted for completion by March 2028, though its specific deployment locations along Japan's vast coastline remain undisclosed.
However, this aggressive spending has triggered alarm in financial markets. Japan already carries the heaviest public debt burden among major economies, with the International Monetary Fund projecting its debt-to-GDP ratio to hit 232.7 percent this year. Economists fear Prime Minister Takaichi's proactive fiscal policies could exacerbate this crisis.
Takahide Kiuchi, an executive economist at Nomura Research Institute, cautioned that while the current budget size might not shock markets, a further increase could deepen the existing turmoil. He pointed out that extra budgets have quickly ballooned under Takaichi's administration, putting financial markets on high alert.
Market Reactions and Policy Stance
The market's nervousness is already visible. The yen has weakened, and yields on Japanese government bonds have risen, drawing uneasy comparisons to the UK's bond market crisis under former Prime Minister Liz Truss in 2022. A weaker yen is particularly painful for Japan, as it increases the cost of vital imports like food, energy, and raw materials, fuelling the very inflation Takaichi pledged to fight when she took office in October.
Despite the concerns, PM Takaichi remains steadfast. She argues that Japan must bolster its national strength through proactive spending rather than undermine it with austerity. "What Japan needs right now is not the undermining of our strength as a nation through excessive austerity fiscal policies, but rather the bolstering of our national strength through proactive fiscal policies," she stated recently. However, in an interview with the Nikkei, she also rejected "irresponsible bond issuance or tax cuts," emphasising a commitment to long-term fiscal health.
The draft budget now moves to parliament for final approval, setting the stage for a crucial period of economic management amid geopolitical uncertainty.
