Japan approves record $785bn budget, boosts defence spending

Japan's cabinet has approved a record-high $785 billion budget for the next fiscal year - including the largest allocation for defence spending ever.

The budget for the year starting from April will be submitted to parliament early next year, will total a record 122.3 trillion yen, exceeding this year's initial budget of 115.2 trillion yen.

Faced with rising government bond yields and a weak yen, the Takaichi administration has stepped up efforts to reassure investors that the government will not resort to irresponsible debt issuance or tax cuts.

Still, new government bond issuance will increase only slightly from this year's 28.6 trillion yen to 29.6 trillion yen, with the debt dependence ratio falling to 24.2%, the lowest since 1998.

Higher tax revenues, projected to rise 7.6% to a record 83.7 trillion yen, will help fund increased spending, though they will not fully offset surging debt-servicing costs, along with higher social welfare and defence outlays.

Debt-servicing costs for interest payments and debt redemption will jump 10.8% to 31.3 trillion yen, with the assumed interest rate set at 3.0%, the highest level in 29 years, as the Bank of Japan exits ultra-loose monetary policy.

Japan already has the highest debt burden in the developed world at more than twice the size of its economy, making it highly sensitive to rising borrowing costs and complicating Takaichi's plans to pursue aggressive fiscal stimulus measures.

This comes at a time when ties with China have been strained after Japanese Prime Minister Sanae Takaichi suggested Tokyo could take military action if Beijing attacked the self-ruled island of Taiwan.

Defence spending has been expanded in the current budget by nearly 9 trillion yen; about $60 billion for the very first time. Defence spending allocated this time around is nearly 10 % more than the previous budget.

Tokyo wants to acquire hypersonic weapons and next -generation fighters, as well as ramp up a coastal defence system by March 2028.

Earlier this month, Japan claimed a Chinese military jet had locked its radar on Japanese fighter jets, calling it a, quote, dangerous act.

This is when a jet possibly prepares for firing. Tokyo has also been under pressure from its ally, the United States, to increase military spending to play a more assertive role.

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