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(Bloomberg) — Japan’s ministries have set a new record with their budget requests for the year starting April 2025, as the nation wrestles with the need to ramp up social security and defense spending while keeping its mountain of debt under control.
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The ministries requested a total of ¥117.6 trillion ($811 billion) for the next fiscal year, representing a 2.8% increase from the initial demand of ¥114 trillion for the current year, according to the finance ministry Wednesday.
Over the past five years, budget requests have increased by an average of 2.2% each year, but inflation of more than 2% has reduced the scale of increases in real terms in the last couple of years.
While Japan is still burdened by the largest public debt load among developed nations, it has made some initial progress in getting its finances under control. In July, the government indicated that Japan is expected to achieve its primary balance goal in the next fiscal year, finally reaching this long-standing target after more than a decade of delays.
“Considering economic growth and the resulting increase in tax revenues, this pace of growth in budget requests should be nearly neutral for the primary balance,” said Uichiro Nozaki, an economist at Nomura Securities Co. “I don’t have the impression that requests jumped dramatically compared with previous years.”
Even if there are additional spending requests for pending items, Nozaki said he expects the initial budget to end up lower than the total requested when it’s finalized at the end of the year.
The record budget requests reflect increased outlays in multiple areas, including defense. The military is seeking around a record ¥8.5 trillion in response to Prime Minister Fumio Kishida’s pledge to strengthen the nation’s defense capabilities. The welfare ministry is also requesting a record ¥34.3 trillion, partly driven by rising social security costs driven by a rapidly aging population.
With the BOJ’s rate hikes and the resulting rise in yields, debt servicing costs are expected to increase. The finance ministry is requesting ¥28.9 trillion for debt servicing in fiscal 2025, up 7% from the current fiscal year. The ministry set the initial rate used for calculating interest payments on outstanding bonds at 2.1%, up from 1.9% for the current year.
Japan’s general government debt is equivalent to 255% of its economy this year, according to the International Monetary Fund. The primary balance forecast does not take into account the associated servicing costs of this debt.
Handling Japan’s heavy debt burden will be a key issue in the upcoming leadership race for the ruling Liberal Democratic Party, which will effectively select the country’s new Prime Minister.
More than 10 potential candidates are seen to be vying for Japan’s top job, with varying views on fiscal policy. While Digital Minister Kono Taro has emphasized the need for fiscal discipline, former health minister Katsunobu Kato supports an approach that pursues both fiscal health and economic growth at the same time.
“The situation is still in flux,” said Nomura’s Nozaki. Even the most popular candidates haven’t disclosed their stances in detail yet, leaving Japan’s fiscal future unclear.
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