As the Japanese government continues its expansionary fiscal stance and interest rates rise, the principal and interest repayment expense on Government Bonds for next year is expected to swell to a record high.
According to the Nihon Keizai Shimbun (Nikkei) on the 23rd, the Ministry of Finance plans to reflect 36.6 trillion yen (about 319 trillion won) for Government Bonds expense—an all-time high—in its budget request for the 2027 fiscal year (April 2027–March 2028).
That is 5.3 trillion yen (about 4.62 trillion won) more than the initial 2026 budget's Government Bonds expense, the previous record. The growth rate is 17%, the highest in the past 20 years.
The sharp increase in Government Bonds expense is attributed to interest rate hikes. The assumed rate applied to calculate Government Bonds interest payments rose to 3.8% from 3.0% in the 2026 budget.
The higher assumed rate reflects the recent sharp rise in Japan's long-term Government Bonds yields, spurred by concerns over fiscal soundness surrounding the Sanae Takaichi cabinet's expansionary fiscal stance, inflation, and expectations of additional rate hikes by the Bank of Japan. On the 18th, the 10-year Government Bonds yield, the benchmark for long-term rates in Japan's bond market, climbed to 2.945%, the highest in about 30 years, putting long-term rates on the verge of entering the 3% range.
In particular, concerns are growing about a vicious cycle in which fears over fiscal deterioration push up long-term rates, higher rates increase the Government Bonds expense burden, and fiscal soundness weakens again. With Japanese government ministries' budget requests for 2027 expected to exceed a record 130 trillion yen (about 1,135 trillion won), if Government Bonds expense accounts for nearly 30% of that, the burden of allocating funds to other items such as growth investment will inevitably increase.
Nikkei said that because the assumed rate is set during year-end budget compilation, if rates rise further by year-end, there is room for Government Bonds expense to increase more. In the process of compiling next year's budget, beyond investments in growth sectors, the funds the Japanese government needs to newly secure for the Takaichi cabinet's priority measures—such as increasing defense spending and a temporary cut to the food consumption tax—could exceed 10 trillion yen (about 87.2 trillion won).
The Takaichi administration has set a policy of securing resources through higher tax revenue, non-tax income, and a review of expenditures, but even that appears difficult. According to the Cabinet Office's medium- to long-term projections, tax revenue for 2027 is expected to be 90.5 trillion yen (about 789 trillion won), up 6.8 trillion yen (about 59.3 trillion won) from the 2026 outlook. That falls short of covering both the increase in Government Bonds expense and the resources needed for new policies.
Nikkei noted that if Government Bonds issued during a long period of low interest rates mature and are refinanced with higher-rate bonds, the government's interest expense burden could increase. As of last year, Japan recorded the highest Government Bonds-to-GDP ratio among major advanced economies, with liability reaching 204.4% of gross domestic product (GDP).
However, because most of the liability is issued as yen-denominated bonds and domestic investors—including the Bank of Japan and local financial institutions—hold a high share, the industry also assesses that the risk of external payment default is lower than in countries with large amounts of foreign currency-denominated liability.