The cabinet led by Shigeru Ishiba is expected to officially approve a record annual budget plan and significantly reduce the scale of new government bonds issued.

According to Bloomberg, the total budget for Japan's fiscal year 2025 (starting in April 2025) will reach approximately 115.5 trillion yen (about 735 billion dollars) this Friday (December 27). This budget plan will increase defense spending by more than 10% and enhance support for local areas, with an increase of about 7% in grants to local governments.

Meanwhile, thanks to impressive tax performance, the Japanese government will reduce the scale of new government bonds issued by nearly one-fifth, down to 28.6 trillion yen. This marks the first time since 2008 that the Japanese government has controlled the scale of new bonds issued to below 30 trillion yen in the initial budget plan.

Analysts believe this may be good news for Japan, which is burdened with heavy government debt.

Defense spending increases significantly by over 10%.

The new budget plan increases by approximately 2.6% compared to the initial annual budget of 112.6 trillion yen for this fiscal year (starting in April 2024), which is basically in line with the government's expectations for overall inflation this fiscal year. Previously, various departments had requested a total of 117.6 trillion yen in expenses.

In the new budget plan, the expenditure items with the largest increases include: a substantial increase in defense spending of over 10%, reaching 8.5 trillion yen; and an increase of about 7% in grants to local governments.

Increasing funding to local governments is another important policy proposed by Shih Tsubaki, who has long called for the central government to strengthen its support for local revitalization. The draft shows that social security spending is 38.3 trillion yen, slightly higher than this fiscal year's 37.7 trillion yen. The new budget does not include reserves for dealing with rising prices and promoting wage growth.

Tax revenue hits a record high.

Due to increased corporate profits, Japan's tax revenue is expected to reach 78.4 trillion yen. Masaki Kuwahara, a senior interest rate strategist at Nomura Securities, stated:

"The basic budget deficit will also shrink significantly. The total budget seems to reflect the government's considerations for fiscal consolidation."

In the context of the Bank of Japan possibly continuing to raise interest rates, the reduction of new government bond issuance is crucial for the Japanese government, as interest rate hikes will put upward pressure on debt repayment costs. According to informed sources at Bloomberg, the Japanese government has set the yield on 10-year government bonds in the latest budget proposal at 2%, higher than the initial budget proposal of 1.9%.

However, the latest budget proposal will still increase Japan's debt burden. The International Monetary Fund estimates that Japan's debt burden will exceed 250% of GDP in 2024. Masaki Kuwahara stated:

"Given the increase in tax revenue, spending can certainly be increased to some extent, but the government still needs to maintain balance. Rising yields will make it more difficult for the government to manage its outstanding debt."

On Wednesday, the Japanese government revised its economic outlook, lowering its expected actual economic growth rate for this fiscal year from the 0.7% predicted in November to 0.4%, while maintaining the economic growth forecast for the next fiscal year at 1.2%.

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Editor/Danial