Fiscal 2026 Budget Proposal: Govt Must Make Every Effort To Gain Market Confidence

Editorial

15:00 JST, December 27, 2025

To strengthen the economy, fiscal policy must also undergo reform. With the full-fledged arrival of an “economy with positive interest rates,” the government must recognize that it has entered an era where the substance of its budget will be scrutinized even more closely.

The government adopted its fiscal 2026 budget proposal in a Cabinet meeting. General account spending totals ¥122.3 trillion, an increase of ¥7.1 trillion over the initial fiscal 2025 budget. This marks the first time it has exceeded ¥120 trillion.

The administration of Prime Minister Sanae Takaichi seeks to realize “responsible and proactive public finances” and a strong economy. In the budget proposal, it has piled up growth and crisis management investments for flagship policies like semiconductor support. Reflecting the severe security environment, defense spending also reached a record high of ¥9 trillion.

It can be said these aspects bear the Takaichi administration’s signature.

In light of rising prices, social security spending reached a record ¥39 trillion, including measures such as raising medical professionals’ wages. This consideration to attempt to prevent a collapse of the medical system also reflects Takaichi’s emphasis on national security.

What is crucial is whether it can win the confidence of financial markets.

New bond issuance was earmarked at ¥29.5 trillion. The scale of new bond issuance significantly impacts market interest rates. In the initial fiscal 2025 budget, new bond issuance was kept below ¥30 trillion for the first time in 17 years. The decision to avoid exceeding the ¥30 trillion line again this year suggests careful consideration of the market’s critical scrutiny.

However, the market remains wary of Takaichi’s fiscal policy. The exchange rate has been in the range of ¥156 per dollar, and long-term interest rates have exceeded 2%. Allowing excessive yen depreciation to persist will not curb rising prices for food and other goods, only worsening the hardships in people’s lives. A sharp increase in interest payments would make it difficult for the government to secure necessary budgetary funds.

Such circumstances could make it impossible to realize either a strong economy or the public’s peace of mind.

In an economy with positive interest rates, while nominal tax revenues increase, so do expenditures and interest payments. Past ways of thinking must change.

The budget proposal projects tax revenue at a record high of ¥83.7 trillion. But at the same time, national debt service costs — including principal repayments and interest payments — have ballooned to a record ¥31.2 trillion. This is due to interest payments surging by ¥2.5 trillion to ¥13 trillion.

National debt has exceeded ¥1.3 quadrillion. Many outstanding bonds were issued during the period of ultra-low interest rates, and they will gradually be replaced by bonds with rising interest rates over time. Interest payments could possibly surge sharply in the coming decade.

While fiscal stimulus is crucial in the wake of disasters or during periods of severe economic downturn, steadily reducing debt becomes critically important in normal times. The government must clearly present an envisioned path to medium- to long-term fiscal stability, continuously review the structure of expenditures and revenues, and demonstrate a commitment to gaining market confidence.

(From The Yomiuri Shimbun, Dec. 27, 2025)