The fiscal 2026 budget under Prime Minister Sanae Takaichi has gained support from the Democratic Party for the People, raising prospects of passage in its original form. However, as the first budget with debt-servicing expenses exceeding ¥30 trillion, insufficient curbs on social security spending have failed to allay market concerns. Rising interest rates pose a risk.
Prime Minister Sanae Takaichi's administration, since taking office in October 2025, has prioritized economic growth over immediate fiscal reconstruction. The fiscal 2026 budget totals ¥122 trillion, marking the first time debt-servicing expenses, including principal and interest, exceed ¥30 trillion. Takaichi told reporters on Friday, “While also taking fiscal discipline into consideration, we have worked on a budget that will harmonize a strong economy with sustainable public finances.”
Markets remain wary of this expansionary fiscal shift. The yield on newly issued 10-year government bonds rose to 2.1%, its highest in 27 years, from around 1.6% before Takaichi's tenure, amid concerns over deteriorating public finances and Bank of Japan rate hikes. The fiscal 2025 supplementary budget swelled to over ¥18 trillion, the largest in the post-pandemic era, and the annual primary budget surplus target was abandoned.
Politically, the ruling coalition of the Liberal Democratic Party and Japan Innovation Party, a minority in the House of Councillors, has secured support from the Democratic Party for the People, ensuring a majority. DPFP leader Yuichiro Tamaki stated, “We will cooperate on the budget proposal,” after demands like reviewing the annual income barrier for income tax were met. This paves the way for smooth deliberations in the January ordinary Diet session. The Constitutional Democratic Party of Japan criticizes it as “extravagant spending” and plans an alternative, but uniting opposition is challenging.
Social security expenses, one-third of total spending and the budget's main component, see only halfway reforms. Compensation to medical institutions for labor costs rose over 3% for the first time in 30 years, accepting the Health Ministry's full request despite Finance Ministry's push for 0.5%. Patient copayments under the high-cost medical expense system will increase, but scaled back from the previous Ishiba administration's proposal, saving about ¥150 billion while expenses still rise ¥760 billion from fiscal 2025. The assumed interest rate for bond calculations jumped to 3.0% from 2.0%, ballooning interest payments by ¥2.5 trillion. Future refinancing of low-rate bonds could surge costs further. The government plans a new fiscal reconstruction target in the summer 2026 Basic Policy on Economic and Fiscal Management and Reform.
