Japan's largest budget proposal in history: "Reducing ultra-long bond issuance" to reassure the bond market, tripling support funds for chips and AI.

On Friday, the Japanese Takashi Cabinet approved a record-breaking 122.3 trillion yen (785 billion USD) budget proposal, implementing active fiscal policy while alleviating bond market concerns by reducing the issuance of ultra-long-term bonds and controlling the scale of new debt issuance.

According to Reuters on Friday, Finance Minister Katsuyama Satuki stated that although the budget scale reached a historic high, it is not excessive relative to the economic size. The ratio of the initial budget to nominal GDP has remained unchanged for three consecutive years. The government successfully kept the issuance of new bonds below 30 trillion yen, achieving a long-standing goal of the Ministry of Finance.

The budget proposal significantly increases investment in cutting-edge technology, with the Ministry of Economy, Trade, and Industry’s spending on chips and artificial intelligence rising to about 1.23 trillion yen, nearly tripling from last year. This includes 150 billion yen in support for state-owned chip company Rapidus Corp. and 387.3 billion yen for AI development funding.

Concerns in the bond market over the Takashi government’s expansionary fiscal policy have pushed up Japanese government bond yields, forcing the government to demonstrate fiscal discipline in budget planning. The issuance of ultra-long-term bonds will be reduced to 17.4 trillion yen, the lowest level in 17 years.

Debt Management: Major Reduction in Ultra-Long-Term Bond Issuance to Calm the Market

Facing pressure from record-high government bond yields, Japan’s Ministry of Finance will lower the issuance of ultra-long-term government bonds by nearly one-fifth from the previous year to 17.4 trillion yen—a 17-year low—in the new fiscal year budget.

Market concerns that the Takashi government’s expansionary fiscal policy may increase the debt burden have resulted in rising government bond yields. Japan already has the heaviest debt burden among developed countries, with debt exceeding twice the size of its economy, making it highly sensitive to borrowing cost increases.

To address market concerns, the Ministry of Finance will begin holding annual hearings with market participants around June of the next fiscal year, gathering feedback and making adjustments as necessary. In June of this year, a bond market selloff forced the Ministry of Finance to make a rare revision to its issuance plan, reducing ultra-long-term bond issuance from 24.6 trillion yen to 21.4 trillion yen.

Total government bond issuance for the new fiscal year (including ultra-long-term bonds) will be 180.7 trillion yen, nearly 5% lower than the total for the current fiscal year (including supplementary budget). The Ministry of Finance will maintain the benchmark 10-year government bond issuance, while increasing the combined issuance of 2-year and 5-year bonds by 2.4 trillion yen.

Technology Investment: Surge in Chip and AI Spending to Drive Industrial Upgrading

The Ministry of Economy, Trade, and Industry’s budget will increase by about 50% year-on-year to 3.07 trillion yen, mainly thanks to a sharp rise in chip and AI spending. Budget support for chips and AI will soar nearly fourfold, from about 300 billion yen last year to 1.23 trillion yen.

In semiconductors, the government has reserved 150 billion yen for the state-owned chip company Rapidus Corp., bringing total official investment in the company to 250 billion yen. For AI, 387.3 billion yen will go toward developing domestic foundational AI models, strengthening data infrastructure, and developing "physical AI" technology.

This large increase in technology investment comes amid fierce competition in cutting-edge fields between the US and China, with Japan seeking to strengthen its capabilities in these key areas. The government also plans, starting next fiscal year, to fund chips and AI primarily through the regular budget rather than temporary supplementary budgets to ensure more stable funding support.

The budget proposal also reserves 5 billion yen to secure the supply of key minerals, including rare earths, and allocates 122 billion yen for decarbonization projects, including next-generation nuclear power plant development.

Fiscal Discipline: Debt Dependency at 26-Year Low

Despite the historic high in total budget, new government debt issuance will only rise slightly from 28.6 trillion yen this fiscal year to 29.6 trillion yen. Debt dependency will fall to 24.2%, the lowest level since 1998.

Tax revenue is expected to grow 7.6% to a record-high 83.7 trillion yen, helping fund increased expenditures. However, tax growth cannot fully offset the surging cost of debt repayment and increases in social security and defense spending.

As the Bank of Japan exits ultra-loose monetary policy, debt repayment costs will jump 10.8% to 31.3 trillion yen, assuming a 3.0% interest rate—the highest in 29 years. This highlights Japan’s extreme sensitivity to rising interest rates given its massive debt.

According to Bloomberg, Finance Minister Katsuyama Satuki emphasized that the new budget reflects the current economic situation and price trends, and the budget is not excessively large relative to the economy. The Takashi government plans to abandon the annual primary balance target for fiscal consolidation, setting a new multi-year goal to allow for more flexible spending arrangements.

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