Japanese media: Japan's debt servicing costs for the next fiscal year will rise by 17%, reaching a record high.

Japan's finances are facing the dual pressures of expanding spending and rising interest rates.

On August 25, according to Japanese media reports, the Ministry of Finance of Japan expects debt repayment costs in fiscal year 2027 (April 2027 to March 2028) to increase by 17.1% year-on-year, reaching a record 36.6 trillion yen, the largest increase in nearly 20 years. At the same time, the total budget requests for fiscal year 2027 are expected to exceed 130 trillion yen, breaking the record for the fourth consecutive year.

Behind the rapid rise in debt costs is the upward shift in Japan's long-term interest rates. The Ministry of Finance has raised the assumed interest rate used to calculate government bond interest from 3% in fiscal 2026 to 3.8%. As low-interest government bonds mature and are refinanced at higher rates, the Japanese government may face even greater interest burdens in the future.

The bond market has already begun to reflect this pressure. On August 18, Japan's 10-year government bond yield rose to 2.945%, approaching the 3% threshold and marking the highest level in nearly 30 years. With fiscal expansion, rising interest rates, and a high debt scale combined, Japan's fiscal sustainability is drawing increasing attention.

Debt Costs Hit Record, Budget Scale Reaches New High

According to the Nikkei, the Ministry of Finance plans to allocate approximately 36.6 trillion yen for the repayment of government bond principal and interest in the 2027 fiscal year budget request, an increase of about 5.3 trillion yen over the initial budget for fiscal 2026, representing a growth rate of about 17%—the largest single-year increase in nearly 20 years.

Among the reasons, raising the assumed interest rate from 3% to 3.8% is a key factor driving the rise in debt costs. Higher rates mean increased costs for newly issued bonds and refinanced maturing bonds, and as previously issued low-interest bonds mature, this effect will become more pronounced.

Meanwhile, Japan's fiscal spending continues to expand. According to reports, the total budget requests for fiscal year 2027 are expected to exceed 130 trillion yen, compared to 122 trillion yen for fiscal 2026, marking the fourth consecutive year of record highs. The newly established "Growth Investment" category has no upper limit, meaning the final budget scale may expand even further.

Financial pressures are also prominent. The extra funds needed for the next fiscal year are estimated at over 10 trillion yen, while the Cabinet Office estimates tax revenue increases at about 6.8 trillion yen, highlighting a clear funding gap. If spending continues to expand while tax revenue fails to cover new demands, the Japanese government will have to rely on issuing bonds to fill the gap.

Long-Term Rates Near 3%, Fiscal and Interest Rate Pressure Cycle

The changes in Japan's government bond market are even more noteworthy.

On August 18, the intraday yield on Japan's 10-year government bonds rose to 2.945%, a new high in almost 30 years—only a step away from 3%. Rising long-end yields not only increase the government’s refinancing and new financing costs, but also further heighten market concerns about future fiscal burdens.

At the same time, inflation data continues to support further tightening by the Bank of Japan. In July, Japan's CPI, excluding fresh food and energy, rose 1.9% year-on-year, prompting more attention to the BOJ's future rate hikes. The scale of Japanese public debt remains high, with data showing that government debt accounted for 204.4% of GDP last year—the highest among major developed economies.

Against this backdrop, the risks facing Japan's finances are forming a worrisome chain: Fiscal spending expansion boosts financing needs, rising interest rates push up debt costs, and higher debt costs further squeeze fiscal space. If long-end rates continue to climb, this pressure cycle may be further intensified.

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