Japan's Record 120 Trillion Yen Gamble: Can Big Spending Beat Inflation?

If approved, the plan would cross the previous record 115.2 trillion yen initial budget that was cleared under former prime minister Shigeru Ishiba for fiscal 2025.

Kyodo News reported that the rise is being driven by higher personnel expenses and other fixed costs as inflation continues to bite, even as concerns grow about Japan's fragile public finances.

For fiscal 2026, which begins in April, debt-related spending, including interest payments and bond redemptions, is expected to touch another record, crossing 28.2 trillion yen, the source said.

Japan already carries the heaviest public debt burden among advanced economies.

Earlier this week, parliament approved an 18.3 trillion yen supplementary budget for fiscal 2025 to fund Takaichi's expansionary economic package aimed at easing rising living costs. The bill cleared the upper house just before the current parliamentary session ended, after being passed by the lower house last week.

Although the ruling coalition led by Takaichi's Liberal Democratic Party does not have a majority in the upper chamber, the package received backing from some opposition groups, including the Democratic Party for the People, after the government accepted parts of their demands related to relief measures.

Under the banner of "responsible and proactive public finances", the latest stimulus is the largest since fiscal 2022, when Japan ramped up spending during the COVID-19 pandemic. The programme focuses on curbing the impact of inflation and encouraging investment to revive growth.

Despite an expected 2.9 trillion yen rise in tax revenue, the government plans to raise 11.7 trillion yen through fresh bond issuance, covering more than 60 per cent of the package, Kyodo News reported.

Financial markets have reacted nervously. The yen and Japanese government bonds have seen selling pressure, pushing long-term interest rates higher in recent days.

To cushion households from high costs, the government has set aside 8.9 trillion yen for relief measures. These include electricity and gas subsidies for the first three months of next year, cash handouts for families with children, and higher financial support for local governments.

Another 6.4 trillion yen has been earmarked for investment linked to crisis management and long-term growth, aligning with Takaichi's push to build what she calls a "strong economy".

The supplementary budget also includes 1.7 trillion yen for security and diplomacy. This will allow Japan to meet its target of raising defence-related spending to 2 per cent of GDP in fiscal 2025, two years earlier than initially planned.

- ANI