Takaichi's Record-Breaking Budget: Tokyo Gambles on Debt as Yen Sinks

Paul Riverbank, 12/26/2025Japan unveils a record budget amid mounting debt and rising borrowing costs, betting on higher taxes and a new multi-year fiscal plan. The Takaichi government walks a fine line between spurring growth and defending market confidence as the yen remains under pressure.

It’s impossible to discuss numbers of this magnitude without recalling the heavy shadow cast by Japan’s national debt—now towering above twice its annual GDP, an image unfailingly conjured in both international boardrooms and Tokyo’s cafés. You’d be hard pressed to find a developed nation shouldering a greater debt burden. But even with that leviathan looming, the government is pressing forward. What choice do they have, some say, with a sluggish yen and the cost of borrowing inching up week by week?

This budget—spanning 122.3 trillion yen, a climb from last year’s already substantial 115.2 trillion—doesn’t just leap ahead for its own sake. When you dig into the numbers, it’s clear: social welfare needs are growing, defense spending is up, and, perhaps most dauntingly, the tab for paying interest on past debts keeps climbing. By some calculations, the cost to service the debt—now up 10.8 percent to 31.3 trillion yen—may soon rival the government’s other large expenditures. The Bank of Japan’s move away from ultra-loose money has left policymakers contending with reality: they’ve set the assumed interest rate at 3 percent, a high-water mark not seen for nearly three decades.

And yet, the government insists it’s keeping new borrowing in check. Plans call for 29.6 trillion yen in fresh bonds—a relatively modest rise from last year. Official projections talk up the debt dependence ratio, which is meant to drop to the lowest point since 1998. Fine as that sounds, skeptics with a long memory recall many such hopeful targets left unmet; for perspective, Japan’s tax revenue for the year is projected at a record 83.7 trillion yen, but that windfall still isn’t enough to keep the budget from expanding.

Behind these fiscal moves lies a subtle, perhaps shrewd, shift in strategy. The administration is stepping away from the traditional commitment to balance the budget each year. Instead, it is floating a broader, multi-year ambition to eventually get the books in order—giving itself some breathing room now to spend in the hopes that a healthier economy (and thus healthier tax receipts) will eventually deliver fiscal discipline. Will this approach restore market trust? That’s less certain. There’s no shortage of nervous glances in the investment community, especially with a yen that can’t seem to find its footing and bond yields showing more life than in years past.

On the ground, things play out differently: ordinary citizens, struggling with higher prices and stagnant wages, are less likely to parse fine fiscal ratios than to notice whether the cost of groceries or utilities inches higher. For them, government promises to “avoid excessive borrowing or unfunded tax cuts” sound almost abstract. Yet it’s the ordinary public, as much as international investors, whose confidence the government must maintain. The Takaichi government, for now, treads a knife-edge—trying to fuel growth, soothe households, and reassure capital markets, all while tiptoeing around the mountain of inherited debt.

The path forward is littered with risks. One cannot keep piling on debt indefinitely without there being a reckoning—whether by markets, by demographics, or by political will. The government’s gamble is that Japan can spend its way to stability, provided it does not lose sight of prudence in the long run.

For now, Japan’s political leaders can find some solace: the bond markets have not yet revolted, the tax take has set new records, and social order endures. But as the world grows more volatile, every incremental rise in interest rates and every dip in the yen’s value brings renewed scrutiny. Past promises linger in the collective memory, and the resilience of trust—in both policy and policymakers—has rarely been as vital, or as fragile, as it is at this moment.

A glance at the Japanese economic landscape this week reveals a government budget both gargantuan and, depending on whom you ask, nerve-wracking. Prime Minister Sanae Takaichi’s cabinet has signed off on what might be called a fiscal colossus: set at roughly $785 billion for the coming year—a sum that would make the heads of most finance ministers spin. Yet in Tokyo, it feels less like a wild leap and more of a delicate, necessary dance.It’s impossible to discuss numbers of this magnitude without recalling the heavy shadow cast by Japan’s national debt—now towering above twice its annual GDP, an image unfailingly conjured in both international boardrooms and Tokyo’s cafés. You’d be hard pressed to find a developed nation shouldering a greater debt burden. But even with that leviathan looming, the government is pressing forward. What choice do they have, some say, with a sluggish yen and the cost of borrowing inching up week by week?This budget—spanning 122.3 trillion yen, a climb from last year’s already substantial 115.2 trillion—doesn’t just leap ahead for its own sake. When you dig into the numbers, it’s clear: social welfare needs are growing, defense spending is up, and, perhaps most dauntingly, the tab for paying interest on past debts keeps climbing. By some calculations, the cost to service the debt—now up 10.8 percent to 31.3 trillion yen—may soon rival the government’s other large expenditures. The Bank of Japan’s move away from ultra-loose money has left policymakers contending with reality: they’ve set the assumed interest rate at 3 percent, a high-water mark not seen for nearly three decades.And yet, the government insists it’s keeping new borrowing in check. Plans call for 29.6 trillion yen in fresh bonds—a relatively modest rise from last year. Official projections talk up the debt dependence ratio, which is meant to drop to the lowest point since 1998. Fine as that sounds, skeptics with a long memory recall many such hopeful targets left unmet; for perspective, Japan’s tax revenue for the year is projected at a record 83.7 trillion yen, but that windfall still isn’t enough to keep the budget from expanding.Behind these fiscal moves lies a subtle, perhaps shrewd, shift in strategy. The administration is stepping away from the traditional commitment to balance the budget each year. Instead, it is floating a broader, multi-year ambition to eventually get the books in order—giving itself some breathing room now to spend in the hopes that a healthier economy (and thus healthier tax receipts) will eventually deliver fiscal discipline. Will this approach restore market trust? That’s less certain. There’s no shortage of nervous glances in the investment community, especially with a yen that can’t seem to find its footing and bond yields showing more life than in years past.On the ground, things play out differently: ordinary citizens, struggling with higher prices and stagnant wages, are less likely to parse fine fiscal ratios than to notice whether the cost of groceries or utilities inches higher. For them, government promises to “avoid excessive borrowing or unfunded tax cuts” sound almost abstract. Yet it’s the ordinary public, as much as international investors, whose confidence the government must maintain. The Takaichi government, for now, treads a knife-edge—trying to fuel growth, soothe households, and reassure capital markets, all while tiptoeing around the mountain of inherited debt.The path forward is littered with risks. One cannot keep piling on debt indefinitely without there being a reckoning—whether by markets, by demographics, or by political will. The government’s gamble is that Japan can spend its way to stability, provided it does not lose sight of prudence in the long run.For now, Japan’s political leaders can find some solace: the bond markets have not yet revolted, the tax take has set new records, and social order endures. But as the world grows more volatile, every incremental rise in interest rates and every dip in the yen’s value brings renewed scrutiny. Past promises linger in the collective memory, and the resilience of trust—in both policy and policymakers—has rarely been as vital, or as fragile, as it is at this moment.