Japan's budget proposal significantly increases investment in cutting-edge technologies, with the Ministry of Economy, Trade and Industry's expenditure on chips and artificial intelligence set to rise to approximately 1.23 trillion yen, nearly tripling from the previous year. To reassure markets, the Japanese government has substantially reduced the issuance of super-long bonds, with the volume of ultra-long bond issuance to be cut to 17.4 trillion yen, the lowest level in 17 years.
Japan's Cabinet, led by Takashi Kawamata, approved a record budget of 122.3 trillion yen ($785 billion) on Friday. While implementing an aggressive fiscal policy, the government aims to ease concerns in the bond market by reducing the issuance of ultra-long-term bonds and controlling the scale of new debt issuance.
According to a Reuters report on Friday, Finance Minister Satsuki Katayama stated that while the budget size hit a record high, it is not considered excessive relative to the scale of the economy, as the ratio of the initial budget size to nominal GDP has remained unchanged for three consecutive years. The government successfully kept new bond issuance below 30 trillion yen, achieving a long-standing goal of the Ministry of Finance.
The budget proposal significantly boosts investment in cutting-edge technologies, with the Ministry of Economy, Trade and Industry’s spending in the chip and artificial intelligence sectors set to increase to about 1.23 trillion yen, nearly tripling from the previous year. This includes 150 billion yen in support for the state-owned chip company Rapidus Corp. and 387.3 billion yen allocated for AI development.
Market concerns over the expansionary fiscal policies of the Koichi Hagiuda administration pushed up yields on Japanese government bonds, forcing the government to demonstrate fiscal discipline in its budget formulation. The issuance of ultra-long bonds will be reduced to 17.4 trillion yen, the lowest level in 17 years.
Debt Management: Significant Reduction in Super-Long Bond Issuance to Reassure Markets
Facing pressure from repeated record highs in government bond yields, Japan’s Ministry of Finance will cut the issuance of ultra-long government bonds by nearly one-fifth year-on-year in the new fiscal year budget to 17.4 trillion yen, the lowest level in 17 years.
Market concerns that the expansionary fiscal policies of the Koichi Hagiuda administration may increase debt burdens have driven up government bond yields. Japan already shoulders the heaviest debt burden among developed countries, with debt exceeding twice the size of its economy, making it highly sensitive to rising borrowing costs.
In response to market concerns, the Ministry of Finance will begin holding hearings with market participants around June each year starting from the next fiscal year to gather feedback and make adjustments as needed. In June this year, a bond market sell-off forced the Ministry of Finance to make a rare revision to its issuance plan, reducing the issuance of ultra-long bonds from 24.6 trillion yen to 21.4 trillion yen.
The total issuance of government bonds in the new fiscal year (including ultra-long bonds) will amount to 180.7 trillion yen, a decrease of nearly 5% compared to the total for the current fiscal year (including supplementary budgets). The Ministry of Finance has maintained the issuance volume of benchmark 10-year government bonds unchanged while increasing the combined issuance of 2-year and 5-year bonds by 2.4 trillion yen.
Technology Investment: Surge in Chip and AI Spending Drives Industrial Upgrading
The budget of the Ministry of Economy, Trade and Industry increased by approximately 50% year-on-year to 3.07 trillion yen, primarily driven by significant growth in spending on chips and AI. Budgetary support for the chip and AI sectors will surge nearly fourfold from about 300 billion yen the previous year to 1.23 trillion yen.
In the semiconductor sector, the government has allocated 150 billion yen for Rapidus Corp., a state-owned chip company, bringing the cumulative government investment in the firm to 250 billion yen. For AI, 387.3 billion yen will be used for developing domestic foundational AI models, strengthening data infrastructure, and advancing 'physical AI' technology research.
This substantial increase in technology investment comes amid intense competition between the United States and China in cutting-edge technology fields, as Japan seeks to bolster its capabilities in these critical areas. The government also plans to fund chips and AI primarily through regular budgets rather than supplementary budgets starting from the next fiscal year, ensuring more stable financial support.
The budget proposal also earmarks 5 billion yen to secure supplies of critical minerals, including rare earths, and allocates 122 billion yen for decarbonization projects, including the development of next-generation nuclear power plants.
Fiscal Discipline: Debt Dependency Hits a 26-Year Low
Despite the record-high total budget, the issuance of new government bonds will increase only slightly from 28.6 trillion yen this fiscal year to 29.6 trillion yen. The debt dependency ratio will fall to 24.2%, the lowest level since 1998.
Tax revenue is projected to grow by 7.6% to a record 83.7 trillion yen, helping to finance the increased expenditures. However, the rise in tax revenue cannot fully offset the sharp increase in debt servicing costs and higher spending on social security and defense.
As the Bank of Japan exits its ultra-loose monetary policy, debt servicing costs are set to rise by 10.8% to 31.3 trillion yen, assuming an interest rate of 3.0%, the highest level in 29 years. This underscores the heightened sensitivity of Japan's massive debt burden to rising interest rates.
According to Bloomberg, Finance Minister Satsuki Katayama emphasized that the new budget reflects current economic conditions and price trends, and its scale is not considered excessive relative to the size of the economy. The Gaoichi administration plans to abandon the fiscal consolidation policy aimed at achieving primary balance on an annual basis and set multi-year targets to allow for more flexible spending arrangements.
Editor/melody