Japan plans to propose a record budget, with the largest expected increase in defense spending.

The Japanese government is expected to approve a record-breaking preliminary budget for the next fiscal year on Friday, which will increase defense spending and support the regional economy. According to a plan draft on Wednesday, the budget for the fiscal year starting in April 2025 will be approximately 115.5 trillion yen (735 billion dollars). Although the draft shows that the Japanese government will still heavily rely on borrowing to provide funds for spending, record tax revenue will reduce the scale of new borrowing by nearly one-fifth, to 28.6 trillion yen. Compared to the initial annual budget of 112.6 trillion yen for this fiscal year, this increase is about 2.6%, which is basically in line with the overall inflation forecasts by the Japanese government for this fiscal year. Previously, the total expenditure requested by various departments was 117.6 trillion yen. The largest increase is in defense spending, which jumps by over 10% to 8.5 trillion yen, and local government allocations increase by approximately 7%. Amidst a tense regional security environment, Japanese Prime Minister Shizo Abe strongly advocates for increased defense spending and improving the working conditions of Japanese military personnel. Nevertheless, the increase in defense budget largely aligns with the planned growth for the coming years. Increasing local government allocations is another important theme for Shizo Abe, who has long called for more central government support for regional revitalization. The report shows that funds for social security have increased from 37.7 trillion yen to 38.3 trillion yen. This budget does not include contingency funds for price relief and wage growth measures. Although the record 78.4 trillion yen in tax revenue will help limit reliance on government debt, the latest budget plan will increase Japan's debt burden. The International Monetary Fund (IMF) has estimated that by 2024, Japan's debt burden will exceed 250% of the Gross Domestic Product (GDP). However, considering that the Bank of Japan may continue to raise interest rates, the Japanese government's reduction in new bond issuance is crucial. This will bring upward pressure on debt-servicing costs. According to insiders, the Japanese government has set a cumulative interest rate of 2% for calculating the national debt servicing costs in the latest budget, higher than the 1.9% in the initial budget for this year. Bank of Japan Governor Kiyohiko Nishimata stated on Wednesday that the Japanese economy is expected to be closer to achieving the Bank's 2% inflation target next year, hinting that the timing for the next interest rate hike is approaching. However, he warned that it is necessary to carefully study the "high degree of uncertainty" surrounding the impact of overseas economies, especially the economic policy of the incoming US President Donald Trump administration. Nishimata highlighted the prospects for wage negotiations between Japanese companies and labor unions next year as factors that the Bank of Japan will carefully consider in formulating policy. This statement underscores the Bank of Japan's determination to further raise the current short-term interest rate of 0.25% next year. Most analysts expect the Bank of Japan to raise interest rates to 0.5% in January or March next year. The Bank of Japan ended negative interest rates in March and raised its short-term policy target to 0.25% in July. It has signaled readiness to hike rates again if wages and prices move as expected. Nishimata said that as labor shortages intensify and push up wages, there are signs of improvement in consumption. He emphasized that after years of aggressive monetary stimulus, the Bank of Japan has made progress in achieving its long-term inflation target. In the current transitional phase towards sustainably achieving a 2% inflation rate, Nishimata said the Bank of Japan will support the economy by keeping the policy rate at a lower level close to the neutral level. However, he said that if the economy continues to improve, the Bank of Japan will raise interest rates, as prolonging excessive monetary support could exacerbate inflation risks.