TOKYO – Japan’s annual government bond issuance is likely to rise by 28% over the next three years due to rising debt financing costs, Ministry of Finance estimates reviewed by Reuters showed on Tuesday, casting doubt on Prime Minister Sanae Takaichi’s claim that tax cuts can be achieved without increasing debt.
According to the estimates, Japan would need to issue up to 38 trillion yen ($248.32 billion) worth of government bonds in the fiscal year starting April 2029, up from 29.6 trillion yen in fiscal 2026, to plug the hole in spending that exceeds tax revenues.
Tax revenues are expected to continue to rise, but will not be enough to cover the steady increase in spending, as a rapidly aging population and rising long-term interest rates will raise social welfare costs and debt service costs.
Debt service costs are likely to reach 40.3 trillion yen in fiscal 2029, up from 31.3 trillion yen in fiscal 2026, accounting for about 30% of total spending, highlighting the burden that rising government bond yields are placing on Japan’s finances.
The estimates, which will be submitted to Congress for consideration, highlight the challenges Mr. Takaichi faces in fulfilling his pledge not to issue new debt to fund tax cuts and spending plans.
Rising inflation and strong corporate profits are boosting nominal tax revenues, while the rollover of low-interest bonds issued in the past will put pressure on Japan’s finances.
The Bank of Japan’s rate hike plans will also maintain upward pressure on bond yields. Since ending massive economic stimulus in 2024, the central bank has slowed bond purchases and raised interest rates as Japan moves toward permanently achieving its 2% inflation target.
This estimate is based on a scenario in which the 10-year Japanese government bond (JGB) yield remains at 3.0%, nominal economic growth rate is 1.5%, and average inflation rate is 1%.
In a scenario assuming a nominal growth rate of 3% and an inflation rate of 2%, debt service costs in fiscal 2029 will reach 41.3 trillion yen.
(1 dollar = 153.0300 yen)
(Reporting by Takaya Yamaguchi, Text by Raika Kihara, Editing by Sam Holmes)
