Photo/Illutration Prime Minister Sanae Takaichi attends a Cabinet meeting on Dec. 26. (Takeshi Iwashita)

The Cabinet on Dec. 26 approved the initial budget proposal for fiscal 2026--the largest ever--with expenditures in the general account totaling 122.3092 trillion yen ($782.9 billion).

This marks an increase of more than 7 trillion yen from the previous year, making it the largest budget on record for the second consecutive year.

The larger scale of the budget for fiscal 2026 reflects higher prices, expanding personnel costs and rising interest rates.

With tax revenues expected to increase significantly, the issuance of new government bonds will be 29.584 trillion yen, falling below the 30-trillion-yen mark for the second straight year.

Bonds will finance 24.2 percent of the total budget, a decrease from 24.9 percent the previous year.

This is the first initial budget drafted by the Takaichi administration, which champions a “responsible, proactive fiscal policy.”

Amid concerns about Japan’s worsening fiscal conditions, the yen has weakened and interest rates have risen. Market players have been paying attention to the scale of the initial budget proposal and how much of it would be covered by new government bonds.

Social security-related expenditures, which account for 30 percent of the general account, increased by 762.1 billion yen from the previous year to 39.0559 trillion yen.

Medical service fees will be raised overall for the first time in 12 years due mainly to high prices and wage increases.

Such costs have swelled due to the aging population and the proliferation of expensive drugs and medical equipment.

Defense-related spending will jump by 334.9 billion yen to 9.0353 trillion yen, reaching the 9-trillion-yen level for the first time.

Additionally, a record 31.2758 trillion yen has been allocated for national debt servicing costs, which cover the redemption of and interest payments on government bonds.

This figure swelled by about 3 trillion yen due to recent interest rate hikes and the rise to 3 percent from the previous year’s 2 percent in the assumed interest rate used for calculating interest payments.

The outstanding balance of ordinary government bonds is expected to reach 1,145 trillion yen by the end of fiscal 2026.

With rising interest rates, debt servicing costs are expected to continue increasing, putting pressure on the budget available for policy measures.

On the revenue side, tax receipts are projected to increase by 5.916 trillion yen from the previous year to 83.735 trillion yen, reflecting strong corporate performances and higher prices.

Despite a 1 trillion yen decrease in revenue from the abolition of the old provisional gasoline tax rate, revenues from income, corporate and consumption taxes are expected to grow significantly.

In fact, overall tax revenue is expected to reach a record high for the seventh consecutive year.

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