Considering Supplementary Budget: Pay Close Attention to Market to Finalize Scale

Editorial

14:59 JST, May 19, 2026

The turmoil over Iran is certain to continue. Prime Minister Sanae Takaichi’s announcement that she will consider compiling a supplementary budget — an issue on which she had previously taken a cautious stance — was likely made in light of this reality.

However, the benchmark long-term interest rate has already risen, and a sense of alarm about fiscal deterioration is growing. It is crucial for the government and the ruling parties to pay close attention to market concerns as they finalize the scale, details and funding sources of the budget.

At a liaison meeting of the government and the ruling parties, the prime minister announced that a supplementary budget for fiscal 2026 would be considered and instructed the ruling parties to formulate specific details. “We will respond as necessary in a timely manner to ensure that the public’s livelihoods are not disrupted,” Takaichi said.

The government has been pouring massive funds into subsidies for gasoline and other fuel costs since March, but it had been argued that funds could run out as early as June as a result of drawing down reserve funds and the government’s discretionary reserve.

Furthermore, the government’s decision to implement subsidies for electricity and gas bills during the summer months of July through September likely made the compilation of a supplementary budget unavoidable.

Supplementary budgets are normally compiled in autumn. In recent years, the government has only started compiling such a budget before summer in 2020 during the COVID-19 pandemic and in 2022 during the Ukraine crisis. The latest move is an unusually early start.

Anxiety over the energy crisis is growing among members of the public, so it is important to respond swiftly.

However, the sharp rise in the benchmark long-term interest rate — driven by expectations of expansionary fiscal policy and an increase in government bond issuance — is a cause for concern.

A year ago, the long-term interest rate was in the mid-1% range, but it reached 2.5% at the end of April. On Monday, the rate surged to 2.8% at one point, a level not seen in about 29½ years.

Rising interest rates not only increase the financial burden on businesses and households and negatively impact the economy, but they also significantly increase interest payments on government bonds and undermine the flexibility of fiscal policy.

To gain the market’s confidence in fiscal management, it is necessary to assess the effectiveness of the budget, to ensure that its scale does not expand unnecessarily and to clearly express when subsidies will be ended.

The subsidies for electricity and gas bills, which began in 2023, have been extended repeatedly. Some are also saying that it is problematic to provide subsidies uniformly to everyone, including the wealthy. The government will carefully narrow down the scope and scale of subsidies.

The subsidy program that has been keeping gasoline prices at around ¥170 per liter is problematic in many aspects. The need to save energy is growing due to the prolonged Middle East crisis, but holding down gasoline prices actually increases demand. A phased reduction plan should also be considered.

Relying too readily on the issuance of deficit-covering government bonds for funding could lead to rising interest rates and the depreciation of the yen, potentially exacerbating inflation. Careful consideration is required to find fiscal resources.

(From The Yomiuri Shimbun, May 19, 2026)