Sanae Takaichi of Japan plans to announce an additional budget, with both fiscal pressure and bond yields rising.

Japanese Prime Minister Sanae Takaichi is preparing to announce the drafting of an additional budget to address the impact of sustained increases in commodity prices caused by the ongoing Middle East conflict. This move not only marks a significant shift in government policy stance, but also further intensifies concerns about the sustainability of Japan’s finances, as long-term government bond yields have reached their highest levels in decades.

On May 18th, Bloomberg reported that informed sources revealed the focus of this supplementary budget is to provide funds for emergency relief measures, rather than economic stimulus. Reuters on Monday cited a government official saying the government may finance part of the additional budget by issuing new bonds. This stands in stark contrast to the public statements made by Takaichi and Finance Minister Satsuki Katayama, who over the past few weeks have denied the necessity of an additional budget.

The news emerged as Japan’s ultra-long-term government bond yields are under significant upward pressure. The yield on 30-year bonds last week reached its highest level since 1999, when bonds of that maturity were first issued, and both 20-year and 40-year yields also hit decade-long highs. The growing expectation of an additional budget and new bond issuance is seen as one of the major drivers behind the recent rise in yields.

Sudden Policy Shift: Relief Takes Priority Over Stimulus

Just last Friday, Satsuki Katayama publicly reiterated that the government believed there was no need for an additional budget at present, attributing part of the recent rise in yields to global market trends. However, with oil prices continuing to climb and existing relief funds rapidly being depleted, market participants largely see an additional budget as almost inevitable.

According to reports, informed sources emphasized that this supplementary budget is designated for emergency relief rather than economic stimulus. The opposition Democratic Party for the People last Friday became the first to submit an additional budget proposal of 3 trillion yen (approximately $18.9 billion), providing a benchmark for the government’s decision.

Japan usually finances additional spending through unexpected tax revenue, unused budget funds, or issuing more government bonds. However, since the current fiscal year has just started, the amount of surplus tax revenue and idle funds remains unclear, greatly increasing the likelihood of further bond issuance—especially if the final budget exceeds the Democratic Party for the People’s 3 trillion yen proposal.

At the same time, the Takaichi government has yet to finalize a plan for temporarily cutting food taxes, and the source of funding remains undetermined. In addition, planned increases in defense spending are continuously adding to the government’s fiscal burden. The combination of pressures is making fiscal space increasingly strained.

At the level of specific relief measures, the government is currently using reserve funds to subsidize gasoline prices, keeping the retail cap at 170 yen per liter.

Takahide Kiuchi, executive economist at Nomura Research Institute, released a report last week noting that if the government maintains the current subsidy level of about 42.6 yen per liter, relevant reserve funds will be exhausted as soon as June 29th.

According to Reuters, the government is also considering restarting subsidies for natural gas and electricity during the summer period from July to September, which previously expired at the end of March. If both measures are implemented simultaneously, the scale of the additional budget will need to expand further.

Against a backdrop of rising fiscal pressure, the Organisation for Economic Co-operation and Development (OECD) and the Asian Development Bank have recently both called on Japan to reduce its reliance on additional budgets, citing the need to preserve necessary fiscal buffer space.

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