On April 7, 2026, the Japanese House of Councillors approved the government's budget for fiscal year 2026, marking the formal implementation of this 122.3 trillion yen fiscal plan. This is the second consecutive year that Japan has broken its budget record, increasing by approximately 7.1 trillion yen compared to fiscal year 2025.
Due to Prime Minister Sanae Takaichi's sudden announcement in January of this year to dissolve the House of Representatives and call a snap election, the deliberations on the budget by both houses of parliament were forced to be delayed by about one month. To avoid difficulties in government operations at the start of the new fiscal year, parliament passed a temporary budget in late March as a transitional measure. Now that the formal budget has been approved, the temporary budget will be fully absorbed.
Where did the 122.3 trillion yen come from?
In terms of expenditure structure, this "most expensive budget in history" presents three core pillars: social security, defense spending, and national debt repayment, which together account for the vast majority of the total budget.
Social security spending constitutes the largest portion of the budget, reaching approximately 39.1 trillion yen, a record high. Japan is one of the countries with the highest aging population in the world, with nearly 30% of its population aged 65 and over. The continued growth of social security costs, including medical care, nursing care, and pensions, has become the most significant structural factor driving up the budget's size. In fiscal year 2026, pension spending is projected at approximately 14.5 trillion yen, medical spending at approximately 12.3 trillion yen, and nursing care and welfare spending at approximately 8.2 trillion yen. With continued price increases, the government has also allocated approximately 800 billion yen specifically for one-time subsidies to low-income pensioners and for raising the basic wages of nursing care workers. However, the cycle of inflation driving up spending and spending driving up the deficit is becoming a chronic problem for Japanese public finances.
Defense spending also hits a record high, reaching approximately 9 trillion yen. This marks the 14th consecutive year of increases in Japan's defense budget, nearly doubling compared to a decade ago. The funds will be used to build a coastal defense system centered on a large number of drones, procure hypersonic missiles and improved Type 12 anti-ship missiles, and strengthen missile defense systems. More symbolically, starting in fiscal year 2026, the Japan Air Self-Defense Force will be officially renamed the "Japan Air and Space Self-Defense Force," and a new "Space Operations Group" of approximately 880 personnel will be established, signifying a major shift in Japan's security strategy from "exclusively defensive" to "proactive deterrence." This change has drawn close attention from neighboring countries and strong opposition from domestic peace groups.
Government debt repayment and interest payments have increased significantly due to rising interest rates. Japan's government debt as a percentage of GDP has reached 263%, far exceeding the level during the Greek sovereign debt crisis. The Ministry of Finance has set the temporary interest rate used to calculate debt repayment costs at 3%, a new high since 1997 and a significant increase from 1.9% in the previous fiscal year. This means that even if the debt balance remains unchanged, the increase in interest rates alone will increase government debt costs by approximately 3 trillion yen. Of the 122.3 trillion yen budget, nearly 30 trillion yen is allocated to repaying the principal and interest on national debt-meaning that for every 4 yen the Japanese government spends, almost 1 yen goes towards debt repayment. Taro Saito, head of the Economic Research Department at the NIO Institute for Basic Research, commented, "Japan's fiscal situation is like someone who relies on borrowing new money to pay off old debts; the slightest fluctuation in interest rates could cause the entire debt chain to break."
"AI for National Prosperity": Investment in Chips and Artificial Intelligence Nearly Triples
Against the backdrop of a record-high overall budget, the Japanese government's investment in cutting-edge technologies is particularly noteworthy. The Ministry of Economy, Trade and Industry's budget increased by approximately 50% year-on-year, reaching 3.07 trillion yen. Of this, the budget for supporting research and development in advanced semiconductors and artificial intelligence nearly tripled, reaching approximately 1.23 trillion yen (about US$7.9 billion). This is described by Japanese media as a core measure of the "AI-driven national development" strategy.
Specifically, the Japanese government plans to allocate 150 billion yen to the state-owned chip company Rapidus Corp., bringing the government's cumulative investment in the company to 250 billion yen. Rapidus is Japan's nationally-funded "chip team," aiming to achieve mass production of 2-nanometer process chips by 2027. In the field of artificial intelligence, 387.3 billion yen will be used to develop domestically developed basic AI models, strengthen data infrastructure, and develop "physical artificial intelligence" (AI-controlled robots and mechanical devices). The government also plans to establish three "AI and Semiconductor Special Zones" in Hokkaido, Kyushu, and Okinawa, providing tax incentives and expedited administrative approvals.
It's worth noting that the government plans to include most of the additional funding for the chip and AI sectors in the regular budget, rather than providing funds through the year-end special budget as in previous years. This approach aims to provide more stable and predictable financial support to these sectors, helping companies with long-term investment planning. The government also stated that it will consider providing multi-year financial support to 17 strategic areas, including AI, semiconductors, shipbuilding, batteries, and biomanufacturing. The Minister of Economy, Trade and Industry stated during the budget deliberations, "This is not a simple industrial policy, but a strategic investment concerning Japan's economic security for the next 50 years."
However, critics point out that Japan faces enormous challenges in catching up in the chip and AI fields. TSMC and Samsung have already taken the lead in 2-nanometer processes, and Intel and IBM in the US are also accelerating their deployments. Rapidus's funding needs are expected to far exceed 250 billion yen, potentially requiring continued large-scale financial investment in the future. University of Tokyo Professor Kazuto Suzuki stated, "The slogan 'AI for national prosperity' is catchy, but Japan lags significantly behind the US and China in software and talent reserves. Simply throwing money at the problem is not enough; fundamental reforms to the education and research systems are also needed."
The deliberation process was fraught with twists and turns: the temporary budget was used for the first time.
The budget deliberation process was quite convoluted, exposing the tension between Japan's political system and fiscal discipline. Normally, the Japanese government should complete the budget's approval by the Diet before the start of the fiscal year-that is, by March 31st. However, due to Prime Minister Sanae Takaichi's sudden announcement in January of the dissolution of the House of Representatives and the call for an early general election, the budget deliberation schedule was forced to be delayed by about a month. This is the first time since 2015 that Japan's budget approval has been delayed until after the start of the new fiscal year.
To avoid government operational difficulties, the Diet urgently passed a temporary budget as "transitional funding" at the end of March. This was the first time in Japanese history that a temporary budget mechanism had been used. This temporary budget only covered expenditures necessary for the basic operation of the government, including civil servant salaries, pension payments, and public utility operations, totaling approximately one-sixth of the formal budget for fiscal year 2026. The temporary budget was valid for 60 days to allow time for the deliberation of the formal budget.
With the House of Councillors' formal approval of the fiscal year 2026 budget on April 7th, the previously passed temporary budget was fully absorbed into the formal budget. Japanese Finance Minister Satsuki Katayama stated at a press conference following the budget's passage, "Although the deliberation process was fraught with difficulties, the timely implementation of the final budget ensures the smooth progress of various government policies. The first use of the temporary budget mechanism also provides valuable experience for dealing with similar situations in the future."
However, this incident exposed a potential risk in Japan's fiscal management. Opposition parties criticized the Prime Minister for dissolving the House of Representatives and sacrificing the normal budget deliberation process for political gain, calling it irresponsible towards the people. The Constitutional Democratic Party representative questioned during a parliamentary debate, "If budget approval is delayed every year due to political struggles, will temporary budgets become the norm? How long can Japan's fiscal discipline be maintained?" Analysts pointed out that budget approval delays could affect the annual planning of local governments and businesses, causing unnecessary disruption to economic operations in the long run.
The Yen's Pain: The Contradiction Between Fiscal Expansion and Monetary Policy
In December 2025, the Bank of Japan took a rare, hawkish step, raising its policy rate by 25 basis points to 0.75%, bringing Japan's interest rate to its highest level in 30 years. This decision was widely interpreted as Japan officially bidding farewell to the era of ultra-loose monetary policy, ending nearly a decade of negative interest rates. However, the rate hike did not support the yen's exchange rate. Following the announcement of the rate hike, the yen depreciated instead of appreciating, quickly falling below the 157 mark from around 155 yen to the dollar, and even touching a more than 30-year low of 161 yen in February 2026.
Behind this unusual phenomenon lies a deep concern in the market about the contradiction between Japan's fiscal and monetary policies. Analysts point out that simply tightening monetary policy is unlikely to fundamentally reverse the yen's depreciation trend-investors are more worried not about the US-Japan interest rate differential, but about the possibility that proactive fiscal policy might further worsen Japan's fiscal situation. When the government raises interest rates to "fight inflation" while simultaneously expanding spending to "stimulate the economy," the contradictory policy signals force the market to sell yen as a response. JPMorgan Chase's chief Japan economist, Ayako Fujita, points out: "The Bank of Japan and the government seem to be dancing two different dances. The central bank's rhythm is tightening, while the government's rhythm is easing. Investors, caught in this confusing signal, can only choose to seek safe havens."
Nomura Research Institute researcher Takahide Kiuchi bluntly states: "The Takashimakata municipal government says 'addressing high prices is the most important thing,' yet it is actually implementing policies that push prices up. This is self-contradictory and reflects the inherent contradiction in the Takashimakata municipal government's economic policies." Large-scale fiscal spending will inject a large amount of yen into the market, objectively exacerbating inflationary pressures. To curb inflation, the central bank will have to further raise interest rates. Interest rate hikes will increase government bond interest payments, further worsening the fiscal situation and creating a death spiral of "fiscal deficit → excessive money supply → inflation → interest rate hikes → even greater fiscal difficulties."
For ordinary Japanese citizens, the most direct impact of this policy contradiction is the continuous rise in the cost of living. The prices of food, energy, and daily necessities have risen by 10% to 20% in the past year, while real wages have remained sluggish. A Tokyo housewife said in an interview, "Last year, a carton of eggs cost about 200 yen, now it's over 300. Electricity and gas bills have increased by almost 30%. The government says the economy is improving, but we ordinary people don't feel it at all." This is perhaps the simplest yet most powerful critique of the "most expensive budget in history"-if people's lives haven't improved, what's the point of such a huge number?
Conclusion
122.3 trillion yen-this "most expensive budget in history" clearly outlines the deep-seated dilemma facing Japan: the rigid social security expenditures brought about by an aging population are irreversible; defense expansion under geopolitical pressure is imminent; the need for fiscal stimulus to revitalize the economy is urgent; and fiscal credibility under a mountain of debt is teetering on the brink. The Sanae Takaichi government is attempting to walk a tightrope between a "strong economy" and "fiscal sustainability," but the market response has been pessimistic-the yen continues to weaken, and long-term government bond yields have climbed to their highest level in 27 years. With the curtain already raised on fiscal year 2026, where this budget will lead the Japanese economy-whether it's a panacea for revitalizing growth or the final straw that breaks the camel's back-remains to be seen. What is certain is that Sanae Takaichi's fiscal "gamble" has only just begun, and every fluctuation in the yen and Japanese government bond markets adds a new chapter to this gamble.
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