Japan plans record debt-servicing budget amid rising interest rates

Japan’s Ministry of Finance is planning a record-breaking budget for the upcoming fiscal year, with debt-servicing costs projected to reach 36.6 trillion yen (approximately $230 billion). This figure includes roughly 16.6 trillion yen for interest payments and 20 trillion yen for debt redemption, representing a 17% increase over the previous fiscal year.

The surge in costs is driven by the ministry raising its assumed long-term interest rate for Japanese government bonds to 3.8%, the highest level used in nearly three decades. This follows the Bank of Japan’s move toward normalizing monetary policy, including a recent policy rate hike to 1.0%.

The total budget request is expected to exceed 130 trillion yen for the first time. Under Prime Minister Sanae Takaichi’s administration, spending priorities include 8.9 trillion yen for defense, 7.7 trillion yen for the Ministry of Economy, Trade and Industry—focused on AI and semiconductors—and 8.7 trillion yen for education. Concerns regarding fiscal sustainability persist as the government continues to rely on new bond issuances to fund these initiatives.