Japan gov’t approves record 115.5 trillion yen budget for FY 2025 #JapanFinance

The government on Friday approved a record 115.54 trillion yen ($730 billion) draft initial budget for fiscal 2025, driven by rising social security and national defense spending, fueling concerns about Japan’s fiscal health.

Prime Minister Shigeru Ishiba, while expressing hope that the spending plan will help support an economy burdened by higher prices, appears cautious about advancing his policies after a shocking defeat in October’s general election, which bolstered the opposition’s influence in a hung parliament.

Ishiba voiced his desire for the swift passage of the budget in the upcoming Diet session starting next month, telling reporters at his office, “We will provide thorough explanations and foster an environment that encourages opposition parties to lend their support.”

The general-account budget for the year starting in April next year exceeded the previous record of 114.38 trillion yen set in fiscal 2023.

While projecting a record-high 78.44 trillion yen tax revenue for fiscal 2025 due largely to robust corporate earnings, the government will also issue new bonds worth 28.65 trillion yen to help finance the budget.

(From L) Internal Affairs and Communications Minister Seiichiro Murakami, Japanese Prime Minister Shigeru Ishiba and Defense Minister Gen Nakatani are pictured at the prime minister’s office in Tokyo ahead of an extraordinary Cabinet meeting on Dec. 27, 2024. (Kyodo)

The issuance falls below 30 trillion yen for the first time in 17 years on an initial budget basis as Ishiba struggles to restore the soundness of state finances, the worst among major developed countries.

But a quarter of the total expenditures will be covered by issuing new bonds, highlighting the government’s continued dependence on debt.

After the Cabinet approved the draft budget, Ishiba reaffirmed the government’s commitment to restoring Japan’s fiscal health, saying, “We must ensure that both economic recovery and fiscal consolidation are achieved.”

About a third of the budget, or a record 38.28 trillion yen, will be used to cover social security costs that have been swelling as Japan grapples with a rapidly aging population and tries to enhance child care support amid a declining birthrate.

Defense spending totaled 8.70 trillion yen, topping 8 trillion yen for the first time, as the country is aiming to enhance its capabilities to address regional threats amid China’s rapid military buildup and North Korea’s growing ties with Russia.

The defense budget, which marked the 13th consecutive year of increase, includes expenditures for mass production of long-range missiles with standoff defense capabilities, or targeting adversaries from outside their strike range.

To stimulate the economy, the initial budget also includes state funding in the semiconductor, artificial intelligence and other sectors, with 100 billion yen going to domestic chip venture Rapidus Corp.

Interest payments and other debt-servicing costs also reached a record 28.22 trillion yen, reflecting rising long-term interest rates as the Bank of Japan is looking to continue tightening monetary policy.

The total amount of outstanding central and local government bonds is projected to reach 1,330 trillion yen at the end of fiscal 2025, equivalent to more than twice the size of Japan’s gross domestic product.

The Finance Ministry set an assumed rate to calculate interest payments at 2.0 percent, up from 1.9 percent for fiscal 2024. The BOJ ended its negative rate policy in March with the first rate hike in 17 years, followed by another increase in July.

Ishiba, who took office in October, now leads the minority government after the ruling coalition led by his Liberal Democratic Party lost a majority in the powerful House of Representatives in the general election.

The drafting of the fiscal 2025 budget comes after the government managed to have parliament pass a supplementary budget for fiscal 2024 last week, with the backing of key opposition parties.

In the hung parliament, Ishiba may be forced to review the draft budget in response to requests by the opposition camp.

The Cabinet Office said this week that the Japanese economy is projected to expand 1.2 percent in real, or inflation-adjusted, terms in fiscal 2025, compared with an estimated 0.4 percent growth in fiscal 2024.

The data was used to estimate tax revenue for the next fiscal year, which would mark a record for the sixth consecutive year, also affected by increased consumption tax revenue amid rising prices of everyday items.

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